Introduction
You may have seen someone offering financial advice call themselves a financial planner and wondered exactly how this differed from a financial adviser. This article helps you look beyond the job title and determine exactly what service you can expect for the fee you are paying.
The five stages of planning for a successful retirement
Let's first define the five stages of planning for a successful retirement. We can then examine which areas a financial adviser and financial planner may cover.
Stage One: Person (Life Planning): Establishing the cost of your current and future desired lifestyle.
Stage Two: Plan (Financial Planning): Building a financial plan to evaluate the feasibility of your retirement goals.
Stage Three: Portfolio (Financial Products): Creating an investment 'engine' to deliver the returns your financial plan requires.
Stage Four: Withdrawal strategy: Constructing a retirement withdrawal strategy and the various 'levers' that can impact the sustainability of your financial plan.
Stage Five: DIY or pay for advice: Deciding between a DIY approach or working with a financial adviser.
Financial adviser
What does a financial adviser do, and what does giving financial advice mean? According to the money and pensions service,
'Advice will recommend a specific product or course of action for you to take given your circumstances and financial goals. This will be personal to you, based on the information you provide. Advice will be provided by a qualified and regulated individual or online by a regulated organisation.'
Financial advice, therefore, has the potential to be quite a narrow offering, primarily focusing on just one stage.
Stage Three: Portfolio (Financial Products)
This may be fine for someone starting their investment journey (for example, an investor opening their first ISA or pension). However, if you are planning for retirement, it may not answer the more significant questions you have, which should all be addressed by a competent financial planner:
Can I afford to retire now?
How much can I spend in retirement?
Can I afford to gift to the children/grandchildren?
I have a range of pensions and investments. How do I optimise them to deliver a retirement income?
It may also mean that you have an investment portfolio that is more volatile than necessary for your retirement objectives to be met. This could lead to unnecessary worry for you when stock markets suffer falls.
Given the above, we would estimate a service focusing solely on providing financial advice offers around 10% of the value of a genuine financial planning exercise, which should also incorporate objective setting, expenditure analysis and creation of a financial plan as shown below.
Financial Planner
In simple terms, a financial planner helps you work out where you want to get to, what you want to achieve and then work out the best way to get there. The output of a financial planning exercise is a financial plan. However, the financial plan in itself is not where the value lies. Instead, it is the time spent working with a financial planner, evaluating possibilities and building your dream retirement. We find this process gives our clients great peace of mind and clarity.
A financial adviser offering financial planning should cover the three stages below.
Stage One: Person (Life Planning)
Stage Two: Plan (Financial Planning)
Stage Three: Portfolio (Financial Products):
In addition, if the financial planner specialises in retirement planning (as we do at Pyrford Financial Planning), they may offer the fourth stage as well - building a sustainable retirement income strategy.
Stage Four: Withdrawal strategy:
Financial planning, done correctly, requires a significant investment in training and tools to deliver a truly meaningful and robust service of good quality. It is also a time-consuming exercise. Research from the U.S. estimates the creation of a financial plan takes around 15 hours.
There are no shortcuts in a financial planning exercise. You should, therefore, expect to pay a professional rate for a professional service, much like you would pay for an architect to assist in planning your house refurbishment.
Cashflow modelling
Cashflow modelling looks at your current and future inflows and outflows and is a vital tool in a financial planner's toolbox. Financial planners tend to use off-the-shelf, third-party tools for much of their cashflow modelling work. These tools do a lot of the heavy lifting – tasks such as tax calculations and 'what if' scenarios can be quickly modelled by a number of them, enabling the adviser to focus on the things that really matter, namely helping the client plan for their financial future. Most of these offerings aren’t cheap and have a steep learning curve, but they are necessary to do the job properly and efficiently.
If you are working with someone who claims to be a financial planner, ensure they build you a cash flow plan (example screenshots below). The cashflow planning exercise typically involves several iterations and 'what-if' scenarios. For example, if one partner were to die tomorrow, would the surviving partner have enough money?
Below are the cashflow modelling tools used for financial planning according to research by the Personal Finance Society, with Cashcalc and Voyant proving the most popular.
We use Voyant as it is well suited to modelling complex taxations, but Cashcalc and Prestwood: Truth are well respected.
Warning signs
Below, we list some warning signs which might indicate you are not receiving a robust financial planning exercise.
Warning sign 1: Cashflow modelling involves making prudent assumptions around longevity, inflation and investment growth. If your financial planner asks what assumptions you would like to use, it might be worth delving into their financial planning experience. I often wonder whether a poor financial planning exercise is preferable to having no financial plan at all.
Warning sign 2: Spreadsheets are used by 7% of financial advisers undertaking financial planning. I love using spreadsheets! In the City, I spent some of my career as an 'Excel jockey', using Microsoft’s ubiquitous tool to price various financial instruments for traders on various Investment Banking trading floors. But (and it's a big but!), there is a time and place for Excel, and given the great financial planning tools available (a few of which I've mentioned above), I would suggest that Excel wouldn't be my first choice for financial planning. If your financial adviser uses a spreadsheet, ask them why they don't use a more complete and robust financial planning tool.
Warning sign 3: Given the quality and value for money of the various professional cashflow modelling offerings, I would also question the benefits of using an in-house financial planning tool (which 2% of advisers do). Keeping a financial planning tool current with various taxation changes is no small undertaking, and if your financial adviser uses such a tool, you should question how this is maintained.
Warning sign 4: The old saying 'you get what you pay for' applies to financial planning. Be very wary of any offer of 'free financial planning' (or free advice, for that matter). It is most likely a 'hook' intended to increase the chances of you investing in the financial product being offered. Almost certainly, there will be some ongoing fees charged.
Warning sign 5: The financial adviser asks you to complete a risk questionnaire too early in the process. We would suggest there is little relevance in knowing how much risk you are happy taking (the risk questionnaire will indicate this) before knowing how much risk you need to take (which the financial plan will give you). Only once the financial planning process is complete should this be discussed.
Conclusion
Financial planning has the power to change people’s lives for the better if done well and potentially for the worse if poorly done. You should bear in mind the following:
Anyone can call themselves a financial planner, but not all of them will offer genuine financial planning.
Not all financial planners will specialise in retirement planning.
Someone who calls themselves a financial adviser may offer genuine financial planning - it's essential to look beyond the job title and find out exactly what service you are being offered.
Some questions you may want to ask financial advisers you are considering working with:
What expenditure analysis will you undertake?
What cashflow planning tools do you use ( if the answer is an in-house tool or a spreadsheet, push back!)
What are your assumptions for your cashflow modelling?
Can you give me a breakdown of where the time is taken and value-added in the service you are offering?
What financial planning qualifications do you have? The global gold standard for financial planning is considered to be the Certified Financial Planner (CFP). You can check if someone has this qualification on the CISI's Wayfinder tool.
Next steps
If you are planning for retirement and want to discover more about our retirement planning service (which includes financial planning), please get in touch for a free, no-obligation meeting.
About us
The team at Pyrford Financial Planning are highly qualified Independent Financial Advisers based in Weybridge, Surrey. We specialise in retirement planning and provide pension advice, investment advice and inheritance tax advice.
Our office telephone number is 01932 645150.
Our office address is No 5, The Heights, Weybridge KT13 0NY
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Although best efforts are made to ensure all information is accurate, you should not rely on this blog for your personal situation or planning.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
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