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The Truth About Financial Planning

Added: 14 January 2014

There are many misconceptions about financial planners and advisers in Australia, which has only been exaggerated by the recent financial crisis.

A few of the most common misconceptions are that financial planners:

  • Are only for the wealthy
  • Are unaffordable
  • Will help you to "get rich quick"
  • Are biased by commissions
  • Are glorified salespeople
  • Are no better than you at making investment decisions
  • Could lose all your money

Anyone who already has a good financial planner will know that these points are simply untrue, but for everyone else, let me dispel these misconceptions once and for all.

Financial planners are only for the wealthy

Whilst it is true that many clients of financial planners are wealthy, it is actually the less wealthy that need good financial planning the most. Wealthy clients, due to their large asset base and income earning capacity, will generally enjoy a much larger margin for error when planning their financial future.

A difference in retirement income of $20,000 for someone expecting to retire on $150,000 a year may simply mean a less extravagant holiday each year. But for someone expecting to retire on $60,000 per year, that amount could be the difference between keeping the family home and having to downgrade.

It's a similar story with risk insurance. If a wealthy person is unable to work for six months due to illness or injury, they will certainly be adversely affected, but they will generally have sufficient savings and investments to enable them to survive. For someone who is supporting their family with a more modest surplus, being unable to work for six months will have far greater consequences and could lead to financial ruin.

Financial planners are unaffordable

Many people believe that financial planning is only for the wealthy, and therefore is only affordable by the wealthy. This is completely untrue.

Depending on the type of planning you require, be it retirement, wealth creation or wealth protection (risk insurance) most financial planners will have a range of fee and commission structures to choose from.

Risk insurance is a huge part of wealth protection, and in many cases your financial planner will be paid by the insurance provider in form of commission. In this case, often there is no separate charge to you, the client, for the advice. Most insurers will charge you same premium whether you go directly to them or via a financial planner, meaning you can receive professional advice without paying any extra. A good financial planner will also help you to find the most cost effective policy for your needs, which could actually save you money.

For investment and superannuation advice, often your financial planner's fees will be paid by the fund manager. Whilst in many cases this fee may be deducted from your account balance, it will not have any impact on your day to day cash flow. Yes the fees will impact on your fund balance, but good advice should always provide you with a net benefit. If your fund is being reduced by 0.5% in financial planning fees, but benefiting by 2% due to better investment advice, that is a positive outcome.

If you are uncomfortable with the idea of commissions, any good financial planner should be able to negotiate a fixed advice fee with you, and have all commissions credited back to your account.

Financial planners will help you to "get rich quick"

Financial planning is not about getting rich quickly. If your adviser tells you he or she can make you "rich" in a short period of time, then you should walk - or run - away. There is a long list of investment managers and advisers who after promising high returns end up collapsing and losing all of their investor's funds.

Whilst it would be great if you financial planner could make you wealthy quickly, the truth is that building wealth is something that takes time. Through good advice, appropriate asset allocation and informed investment decisions, financial planning aims to build your wealth over an appropriate time frame and in a sustainable manner.

Whilst anyone can go out and chase the highest returns every year, history shows that this is near impossible for even the greatest investors. With greater returns comes greater risk, and what is the point of chasing an extra 1% investment return if it means you can't sleep at night?

In addition to the investments alone, a good financial planner will also look at the taxation implications, estate planning and other factors when making investment recommendations.

Financial planners are all biased by commissions

It would be naive to say that not a single financial planner is biased towards certain companies by commission, but this is simply not true of good financial planners.

The truth is that many investment and insurance product providers pay very similar commissions, meaning that the difference between recommending company A and company B may be only a few dollars. Only the very worst financial planners would put their reputation on the line for an extra $20 in commission, and they're not the planners you'd want to deal with anyway.

A good financial planner understands that forgoing a few dollars commission today will generally bring in far more repeat business and client referrals in the future.

If you are uncomfortable with the idea of commissions, any good financial planner should be able to negotiate a fixed advice fee with you, and have all commissions credited back to your account.

Financial planners are glorified sales people

Whilst almost anyone can go and sell cars, mobile phones or computers, financial planners in Australia are subject to rigorous licensing , education and ongoing professional development standards.

Anyone calling themself a financial planner and dealing in financial products will have to meet the minimum education requirements set by ASIC (Australian Securities and Investments Commission), the government agency which oversees all financial matters in Australia. To provide advice on investment and insurance matters, a financial planner must have completed a course such as the Diploma of Financial Services (Financial Planning) or equivalent.

In addition to the initial education requirements, financial planners must complete a minimum number of hours of ongoing professional development each year. This includes short courses, presentations and professional reading.

All financial planners are regulated by ASIC and must either hold their own AFSL (Australian Financial Services License) or be an Authorised Representative of an AFSL holder. If ASIC revokes someone's license or authority they will no longer be able to provide financial advice in Australia.

In addition to the above, financial planners are subject to the Corporations Act, which details the laws they must operate within. A breach of these laws can result in criminal charges, with the maximum penalty for some breaches involving prison time.

Few other professions in Australia involve the same level of licensing and regulation as financial planning, and very few others involve the possibility of a criminal offence or a stint behind bars.

Financial planners are no better than you at making investment decisions

It is not uncommon for a client to make a better decision than their financial planner, but it is very uncommon for them to do this consistently.

A good financial planner spends every moment of their working day - and much of their nonworking day - dealing within financial matters. They are better placed than anyone else to advise you on not only which insurance to take or which investments to hold, but also the most tax effective and efficient way of doing so.

A good financial planner will have more experience, more education, and more relevant and up to date knowledge to ensure you are receiving the best advice possible. Much more so than the casual investor who simply bases their investment decisions on websites and the media.

If you are consistently making better decisions than your financial planner, it's time to find a new one.

Financial planners could lose all your money

Due to the very nature of investment and risk, it can never be guaranteed that you won't lose all of your money, but it is possible to manage this risk in a way that makes the chances of such an event very unlikely.

Take the following example. An investor reads in the media and hears from mates that Company A has been providing great returns. Based on this, the investor puts all of his money into Company A. There are a few good months of returns, so he recommends the same investment to his other friends. Then the inevitable happens, the company collapses and everyone loses their money. This is not uncommon, the investment was simply too good to be true.

If the same investor had sought the advice of a good financial planner, the planner would never have recommended that the investor place all of his funds into the one company.

Instead, a good financial plan will incorporate diversification to reduce the chance of losing all of your money. It works because whilst there is a possibility that one or two investments in a portfolio may perform poorly, and may even collapse, it is unlikely that all investments within the portfolio would suffer a similar fate.

Take the recent financial crisis as an example. Many investors chased the high returns of listed property trusts and managed investment companies. And why wouldn't you? They were providing huge returns and making people wealthy. But when the financial crisis hit, many of these companies not only lost a lot of money, some of them collapsed completely and lost every cent.

A well diversified portfolio would have had some exposure to this sector, however it would have also included diverse investments such as grocery retailers who didn't suffer near as much, and fixed interest and cash investments which actually performed quite strongly during the worst of the crisis.

A well diversified portfolio will not protect you completely from any loss, but a 10% loss during the bad times is much better than a 100% loss.

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General Advice Warning: The information contained within this website is general in nature and does not take into account your personal needs and objectives. You should not act upon any information without first seeking professional advice. Equita Financial Services Pty Ltd is no longer an authorised representative of an AFSL, and is therefore not licensed to provide financial advice. Please read the terms and conditions of use for this website.