Many initially seek financial advice because they want help with something like a pension or making intelligent investment decisions.
However, pensions or investments are only a means to an end which is to help you pursue your goals. An advisor cannot manage a portfolio or create a robust financial plan unless they have a holistic view of your overall financial life.
Comprehensive financial planning requires an advisor who will take a deep dive into your current finances, personal and professional goals, and top concerns. This process will involve the following steps.
1. A thorough discovery process
Financial planning is not just about numbers, it is about you. This includes your achievements and challenges today, your dreams for tomorrow, and what you want to leave behind. Through the discovery process, your advisor should ask about:
What keeps you up at night
Your interests and hobbies
Your professional and personal goals
They should also review all your financial information, such as:
What you are spending now and what you want to spend in the future
Your cash balances
Your assets (including investments, property, and businesses)
What you owe
What insurance policies you have in place
2. A timeline for your goals
Financial planning is about pursuing your goals, but the timing of these goals is crucial. Goals should be clearly articulated and prioritized.
For example, a younger person might map out:
Short-term objectives, such as building up an emergency fund or saving for a new house.
Medium-term objectives, such as saving for their children’s university costs.
Longer-term objectives, such as retirement.
Those later in their careers might have different goals and timelines:
Short-term objectives might include paying as much into pensions and investments to fund retirement.
Longer-term objectives might include making gifts to family and ensuring they maximise the amount they can pass to their loved ones in the event of their deaths.
3. An investment strategy to get you there
You would not let a doctor prescribe a treatment without having done a thorough diagnosis. Advisors are no different. We cannot make investment recommendations without a complete understanding of your current financial situation, objectives, and constraints. A critical investment decision is agreeing on a suitable mix of assets (equities, bonds, cash etc) to meet your goals and objectives. This considers both your ability and willingness to tolerate risk.
The ability to tolerate risk is principally numbers based and worked out through the financial planning process. Willingness is more subjective, so your advisor must ask the right questions to measure how comfortable you are with various forms of risk.
Using everything they know about you, your advisor should recommend a suitably diversified investment portfolio to achieve those objectives. Depending on your specific situation and your tastes and preferences, an advisor should be able to offer a variety of strategies to meet your goals.
Most investors are best served with a simple, low-cost portfolio.
Others may prefer to have a more complicated portfolio involving a higher level of costs.
Others may want a strategy that puts Environmental, Social, and Governance (ESG) issues at the forefront, so their portfolio aligns with their values.
4. Stress testing
Nobody can predict the future, but the future economic environment will affect how likely it is that you will meet your goals. Rather than guessing one outcome, your advisor should run your plan through a range of different market scenarios. This involves powerful planning software which takes all the data on your situation, runs the simulations, and calculates your probability of success.
You can conclude a goal is “On Track” when most of the scenarios provide or exceed the value required to meet all your life goals. As you change the inputs of your financial plan, you can see how they change your likelihood of success.
5. Taking human capital into account
A plan is not robust if it does not consider what for most of us is our biggest asset; our ability to earn a living. Insurance is a critical part of your plan because it can help keep your family’s finances on track should something happen to you or your spouse. Your advisor should look at your coverage for life, disability, and other types of insurance to ensure you are protected.
In addition, those with a secure job might be well placed to take more risk with their portfolio than those with less secure employment.
6. Estate planning
If you have a will in place, a financial advisor can review it and assess whether anything is missing or out of date. If you haven’t started planning yet, your advisor can help you articulate your intentions and share recommendations with whoever is writing your will. It can also look at if there are opportunities to gift money now.
7. Tax planning
Taxes are unavoidable, but you do not need to leave HMRC a tip when you pay your bill. Your financial plan should be aware of taxes at every step to help you keep more of your money. A financial advisor can help you take advantage of opportunities like pension contributions, ISAs, using allowances and gifting. If you already work with an accountant, your advisor can work alongside them to ensure everyone is on the same page.
8. Ongoing monitoring and adjustment
A one-off financial plan quickly becomes worthless. Plans are living documents which need updating as your life changes and your goals shift. So that you know exactly when your advisor is assessing your progress toward important goals, your plan should schedule in regular reviews.
By carefully monitoring all the details in your financial plan, your advisor can help you assess which goals you’re on track to meet, which goals need attention, and what tasks you can take now to improve your financial circumstances.