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In the absence of value, cost is an issue

By David Kop posted 14-05-2018 15:59

  

In the absence of value, cost is an issue

Consider your favourite hamburger restaurant, where only the best quality ingredients are used and the patty is cooked on order to your unique specifications. However, to get this it costs R 150 and you need to wait 45 minutes for your meal. Contrast this with a drive thru takeaway. You get the standard burger that is mass produced, precooked and waiting for someone to come collect. The wait time is less than five minutes and the cost is under R 50. Which one would you choose? Would you always get the take away because it is cheaper?

If you are looking for the full experience of eating a hamburger then the favourite restaurant is the logical choice. If it is the day before payday and you are just in a rush to get a meal in before the next meeting, then take away it is.

This is why cost should not be focussed on in isolation. Cost becomes an issue where there is a lack/absence of value. So now that our hunger is satiated, how do we apply this to financial planner or financial advisor.

Can working with an adviser help you get better returns?

According to a concept researched and published by Vanguard, named Advisor’s Alpha, an advisor can achieve better returns  to the tune of about 3% per annum[1].  They have identified three areas in which an advisor can add value namely, Portfolio Construction (asset allocation, cost effective implementation, asset location, total return vs income investing), Wealth Management (rebalancing, spending strategy) and Behavioural Coaching (advisor guidance). I will be focussing on behavioural coaching for the remainder of this article.

Behavioural Coaching

One of the biggest dangers to a financial plan is sticking to a financial plan when emotions run high. There are many examples of investors selling out when there is  a dip and thereby locking in losses just before a bounce.  A study[2] by Vanguard analysed the performance of 58 168 self-directed Vanguard IRA® investors for a period of five years that ended 31 December 2012. The study showed that investors who exchanged money between funds or into other funds had worse performance in their portfolios, when compared to  investors who stayed the course.

So, if you are your own worst enemy when it comes to sticking to your financial plan, this is where a financial planner can add the most value.

Back to the analogy

This is where you need to consider your financial plan. Is the financial plan about the numbers or is it about you? Are you getting generic rule of thumb advice or do you have a plan that is tailored to you? There is heighted awareness about what has been termed lifestyle financial planning.

Lifestyle financial planning differs from traditional advice, in that instead of jumping straight into the numbers, the financial planner first takes time to understand the cleint and what is important to them as an individual, and understanding the lifestyle you want to live now and in the future. Only once this is understood,does the planner jump into the hard facts and numbers and develop a financial plan.

The importance of this process is that, if you get a financial plan that is based on what is important to you and aligned with your personal values and goals, you will be less likely to deviate from the plan, which will lead to better outcomes.

What about six-step financial planning process?

Does lifestyle financial planning make the six-step financial planning process irrelevant? In my opinion, no. The process does not dictate how financial planning must be done, but rather provides a framework in which financial planning could be done.

Step one – Establish the relationship

While there are certain legislative requirements that need to happen in this step the idea is that both you and the planner are deciding whether there is a fit and you can work together on your financial goals and needs. After this stage you and the planner would have an agreement to work together understanding what roles and responsibilities each party would have in the relationship.

Questions that could be discussed at this stage[3] are:

  • Who you are.
  • How is it you would like the planner to help you?
  • What do are you already doing?
  • In board terms what are you trying to accomplish?
  • What regarding your finances concerns you the most?
  • How on track are you with accomplishing your goals?
  • What is the next step

Step 2 – Gather Information and Set Goals

In traditional advice process, this is where you would start crunching the numbers. In a lifestyle financial planning process, this stage would be about delving deeper and helping the client talk through the life they want to live. This stage is first and foremost about the conversation and then about the numbers.

Step 3 – Analyse the information gathered

The reality is that the analysis stage actually starts in step one and culminates in this step. It is not a step that is done in isolation, but rather through the planner asking probing questions in step one and two, and then only the planner and client will start the analysis process. There will be research that the planner will need to do based on the client’s unique circumstances.

Step 4 - Develop and present recommendations

In this step the adviser will present the financial plan to the client. This is where the planner provides guidance and coaching to the client  that is needed to achieve their life goals. I have used the words guidance and coaching here, not instructions. It is important that in this step the client is given confidence, that they fully understand the recommendations and in their own mind can justify the action(s) taken.

Step 5 - Implementation

In this step, an agreement is reached on how the plan will be implemented. The implementation could either be trough the planner, other professionals, or if products are needed, directly with product suppliers. The important message here is that action must be taken, otherwise the plan created would become a wasted document.

Step 6 - Review

The review is not just feedback on the performance of the investments that has been implemented. The review process is more of a progress report. The discussion during this step is “When we last met, we agreed that this was the goal, let’s see how we are doing in meeting that goal.”. The conversation is then not about what investment returns was achieved, but rather how you are tracking against your identified goals in your personal drafted financial plan.

Conclusion

If you and your financial planner are in sync about what goals you want to achieve and what lifestyle you want to live, the advice is based on your personal values and the measurement is how you are tracking against your goals, the value that you get out of the relationship will far outweigh the cost. Cost only becomes a problem when there is no value.

[1] https://advisors.vanguard.com/iwe/pdf/FASQAAAB.pdf

[2] Most Vanguard IRA® investors shot par by staying the course 2008 -2012

[3] https://www.investopedia.com/articles/financial-advisors/080415/7-questions-all-financial-advisors-need-ask.asp

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