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How Does Financial Planning Work?

Jul 30, 2021 9:56:16 AM

How Does Financial Planning Work?

When considering using the services of a financial planner, it is important to familiarise yourself with not only what they do or what you expect from them, but also how they work.

According to the Financial Planning Association of Australia (FPA), there are six (6) key elements when it how it comes to the workings of financial planning[1]. The better you are prepared and understand this process, the better you can maximise the outcome in your sessions and results.

DEFINING THE SCOPE OF ENGAGEMENT

Firstly, your financial planner needs to take the time with you to define the scope. This is to say how they work, what they can do, can’t do and if they believe that they can assist you through engagement.

As previously mentioned, the financial planner may review your current situation and advise you spend 6-12 months with a financial coach to get any debts under control, potentially get some more funds in savings or a combination of both before you get started with the engagement.

By defining the scope of engagement, it is always ideal to get this in writing, so you can take the document away, re-read and ensure you understand the next phase in your financial journey.

IDENTIFYING YOUR GOALS

Much of financial planning is about identifying your goals. Remember back to the start of this eBook, in which we outlined the importance of treating yourself as a business with goals, objectives and benchmarks to achieve? This is how financial planning works.

Without goals, you have nothing to benchmark both you and your financial planner’s performance upon. Again, these need to be S.M.A.R.T, that is Specific, Measurable, Achievable, Relevant & Timely. So don’t put down you want to purchase a $750,000 Rolls Royce within 6-months of starting with a financial planner – unless you have the realistic capacity to achieve that within that time.

Clearly defined financial goals hold you and your financial planner to account, but also allow you to iterate & assess these as your financial journey continues.

ASSESSING YOUR FINANCIAL SITUATION

Financial planners, thanks to their continuing education and training, are experts in reviewing your current financial situation.

This assessment includes reviewing how much cash in the bank you have, debt (both bad debt and good debt) liabilities, superannuation, insurance levels and any assets. This allows them to provide you with a snapshot from which to move your financial plan forward. It also enables your financial planner to review your capacity to invest, divest, upgrade products and services to maximise return and minimise interest/commissions paid to third parties.

PREPARING YOUR FINANCIAL PLAN

Once your planner has your goals, current situation and has clearly defined the scope of engagement, they will now go about preparing your financial plan.

This should include methods & strategies, products & services and advice on how to take yourself from your current situation – which they have just assessed – toward to goals and objectives you have laid out.

Within this plan, as a client, you have every right to ask questions. For example, a financial planner may suggest you change your superannuation fund. You need to ask why, look at short, medium and long-term returns of both funds, and ensure that you are changing for reasons that suit you – not just the financial planner.

Although the Royal Commission into the Banking, Superannuation and Financial Services Industry, has straightened out a lot of the ‘pushing of third party services’ that are not appropriate or offer the greatest financial return to financial planners, commissions and payments still exist. It is always important that you as the client review all the PDS (product disclosure documents) and like-for-like performances of the funds to ensure you are getting solutions that suit your needs.

IMPLEMENTING THE RECOMMENDATIONS

Once a plan has been presented, and both you and your planner are comfortable, it is time for implementation.

This could mean the establishment of new bank accounts, moving superannuation to a new provider or SMSF (Self-Managed Super Fund), investment in funds, setting up trust accounts, shares or other financial instruments and so on.

At this stage, your financial planner more than likely will be working across your financial and professional service providers to get everything established – such as your accountant and lawyers.

REVIEWING THE PLAN

One of the most important areas of any financial plan is that it stays current. Your financial circumstances may change, they may get better, you may have a windfall, you may inherit some money – meaning you will constantly need to review your plans. Conversely, you may lose your job, you may separate from your spouse or suffer financial hardship through bad investments.

As such, you and your planner need to regularly review the plan, to ensure you are on track for achieving the goals, and if circumstances do change, then iterate the plan accordingly to ensure that you can manage what is required to get you where you want to go.

[1] https://fpa.com.au/about-financial-planning/how-it-works/

What does a financial planner not help me do?

Jul 30, 2021 9:52:28 AM

What does a financial planner not help me do?

Just as the previous chapter outlines what you should be working with your financial planner on, there are also several things that are outside of the financial planners ‘swimming lane’ that should always be worked through with the relevant professional.

A good financial planner should work with not only your other financial consultants but also any business advisors (if you run your own business), lawyers and other professionals you need to surround yourself with as your investment portfolio grows, diversifies and becomes more complex.

There are certain areas that although a financial planner can be involved in the process, they should leave this or recommend this to other qualified professionals.

Sourced from the Australian Government’s Money Smart website, a financial adviser can give you general financial adviceThis type of advice doesn't take into account your personal situation or goals, or how it might affect you personally.

A financial adviser can also give personal financial advice. This advice is tailored to your financial situation and goals and is in your best interests. The advice can include:

  • Simple, single-issue advice— Help with one financial issue, for example, how much to contribute to your super, or what to do if you inherit shares.
  • Comprehensive financial advice— Help to develop a financial plan to reach your financial goals. This covers things like savings, investments, insurance and super and retirement planning.
  • Ongoing advice— Regular monitoring and review of your financial plan and affairs.[1]

So, what shouldn’t a financial planner do?

Your financial planner should not provide accounting advice. No one should be offering you accounting advice, except for your accountant. This includes tax advice, lodging tax returns, setting up arrangements with the ATO and working with you to set up trust accounts, legal entities etc.

You need to ensure that you are getting a sign off from your accountant on all these matters and many more. Remember, they are the gatekeepers to much of the activity that happens with your accounts.

Stay away from getting legal advice from anyone other than a lawyer. This goes without saying that anything legal in nature MUST be attended to by a registered, licensed lawyer. Although your accountant or financial planner may be able to set things up or work with you on matters, much of the time a lawyer must be involved and must sign off on matters such as a trust account.

Yes, it will cost money to engage accountants, financial planners and lawyers, but a lot of these costs are ‘one-off’ (such as setting up a trust) or annual costs (such as tax returns) but setting them up correctly can mean the difference between winning and losing, making money and losing money, and being within or outside the law – it's that simple.

Your financial planners are not there to take advantage of you, they are there to work with you and achieve your financial goals- without your success, most of the time they cannot enjoy success either – remember that.

In the end, it comes down to the ‘swimming lanes’, you wouldn’t have a plumber fix your electrical sockets, so don’t have a financial planner work outside their area of expertise.

[1] https://moneysmart.gov.au/financial-advice/choosing-a-financial-adviser

What does a financial planner help me do?

Jul 30, 2021 9:37:09 AM

What does a financial planner help me do?

There are many reasons that people seek advice from a financial planner. Financial advice can be useful at turning points in your life, like when you're starting a family, being retrenched, planning for retirement or managing an inheritance.[1]

The key is that you, as the client, understand fully what is on offer, what is being suggested and most importantly don’t sign off on anything unless you are completely comfortable.

There are a wide array of things in which a financial planner can assist, depending on your financial position, age and risk tolerance.

Setting your financial plan (roadmap)

One of the most important functions that a financial planner can assist you with is setting your financial goals and plan in place. Known as a roadmap, this will assist you in working out how much you need to be comfortable, how much you can invest, borrow or save and how to set up a diversified portfolio so you can be prepared for the unexpected.

A financial planner is qualified and skilled at reviewing and understanding your personal circumstance, and recommending instruments that can assist you in building wealth, getting out of debt and increasing your quality of life.

This is not to say you will be taking baths filled with money, it is more about setting realistic expectations of what you can do, then showing you how, where and when to do it.

Investing

Investing is not just a mechanism for those wealthy few among us. You can in many instances invest as little as a few hundred dollars in ASX listed shares – on brokers such as IG Markets – or even invest in property or part of a property for as little as $100 per brick – Brick-X.

A financial planner can help you save to invest, invest money you may have come across as a windfall from work or a family gift, not to mention recommend more complex instruments such as listed funds, property funds and alternative investments should they be appropriate and fit within the objectives of your financial plan.

Constantly undertaking CPD (compulsory professional development), financial planners are up to date with all the latest investment vehicles, and can also prevent you from investing blindly in speculative fads – such as cryptocurrency, without the proper guidance and warnings of potential losses.

Setting you up for retirement

If you are under 50, you seldom think of your retirement. Sure, you may have superannuation – but is this going to be enough to continue to enjoy your standard of living?

Financial planners are experts in working with retirement planning. From setting up self-managed superannuation funds (SMSF), passive investments that make money while you sleep – such as investment portfolios, property etc – or simply showing you how much money you will need in both assets and cash to comfortably retire.

In many instances, people meet with financial planners too late and feel as though they are scrambling to get everything done. The key is setting up the financial plan/roadmap as early as possible.

Saving for children

Children cost money; it is as simple as that, with estimates ranging from $159,120 up to $548,500 over 18 years[2] - and this is before you may want to send them to private schools!

Your financial planner can work with you to set up education plans with small weekly or monthly contributions.

You may need a bigger house or a new car - all of these can be proactively built into your financial plan as an iteration. Saving for children will allow you to continue to enjoy the things you love doing, but ensuring your children have the best in life – without you having to go out and work more hours, or get a second job to pay for their needs.

Estate Planning

A topic that most of us don’t love talking about, but it is vital especially if you have a partner, children and /or financial investments. Regardless of your personal circumstances, estate planning is important because it helps to ensure you are looked after during your lifetime according to your wishes and that on your death your assets will be managed and transferred according to your wishes, in the most financially efficient and tax-effective way[3].

Your financial planner can ensure you have adequate levels of life insurance should anything happen to you, so your family is not left holding large debt and no way to pay them. They can also ensure that your final will and testament is set up in a way that those you love receive what you had intended.

Although a lawyer needs to write up and sign off, your financial planner is a vital part of this process.

Putting debt to work

Not all debt is bad debt – this is true! Your financial planner is able to educate clients on the difference between good and bad debt, plus ensure the debt is structured in the best way possible.

Good debt has the potential to increase your net worth or enhance your life in an important way. Bad debt involves borrowing money to purchase rapidly depreciating assets or only for the purpose of consumption.[4]

Bad debt would be categorised as:

  • Credit card debt
  • Personal & car loans
  • Buy it now, pay later accounts – such as Zip, Afterpay etc.

While good debt is:

  • Mortgage debt
  • Investment loans
  • HECS debt
  • Business debt
  • Margin loans
  • SMSF loans[5]

When it comes to debt, it is important to have an understanding of what debt it is important for you to have to grow your quality of life versus that which just promotes your consumption or short term gratification of a need or want. A good financial planner can assist you with this, and ensure you are not taking on more than you can handle.

There are many areas in which a financial planner can assist you, and this is by no means an exhaustive list, but it is important to note that your personal circumstances will dictate what a financial planner can provide you, when and how.

As your financial situation strengthens due to sticking with the plan, just like a good book you will be presented more options, investment vehicles and potential revenue making ideas for you to minimise your expenses, maximise your financial position and enjoy your life to its maximum.

[1] https://moneysmart.gov.au/financial-advice/working-with-a-financial-adviser

[2] https://www.finder.com.au/life-insurance-and-the-cost-of-raising-children

[3] https://www.aetlimited.com.au/__data/assets/pdf_file/0011/223121/Your_guide_to_estate_planning_brochure_2014_v3.pdf

[4] https://www.investopedia.com/articles/pf/12/good-debt-bad-debt.asp

[5] https://assurewealth.com.au/15-ways-a-financial-planner-can-help-you/

How to get the best results through your financial consultants?

Jul 30, 2021 9:31:35 AM

How to get the best results through your financial consultants?

Now that you have a fundamental understanding of the roles of accountants, financial planners, financial advisors, and financial coaches, it is key to work through how to maximise their effectiveness and efficiency.

You are ultimately responsible not only for the inputs (cash) and the opportunity cost (what you must give up in order to invest, pay down debt or activate the strategies the consultants have suggested), but you also have to live with the result (profit or loss).

So, although you may surround yourselves with professional experts, it is a fool's errand to walk in blindly and not pay attention to what is being recommended. This means getting second opinions before embarking on large investments and ensuring you have the financial acumen to set your financial journey on the right course.

How to get the best results for your financial investments

In childhood education it is said that “it takes a village to raise a child”, this is also true in the world of personal finance. You cannot achieve results by relying on advice from your accountant – it's not their job to advise you on investments. Similarly, you can't ask your financial coach or planner to do your annual tax returns.

The key to success and maximising your results is to surround yourself with trusted professionals that work together on your common goals. It is true that they will have differing ideas on what should be done, when you should be investing or how, but there are a range of strategies to keep everything on track.

Setting clear objectives or roadmap from the start

As mentioned in previous chapters of this book, when it comes to the role of your financial planner, it is about setting a financial roadmap for you.

By working with your financial planner to set this roadmap at the beginning, you are setting yourself up for the best chance of success through collaboration, iteration and compliance at every required turn.

Your financial planner is your ‘long term’ advisor, they may even direct you to first work with a financial coach for 12-months before coming and sitting down with them again – to get your financial affairs in order, debts paid down etc.

They will also advise you when it is important to see an accountant, and why – ie. prior to tax time.

By setting the goals and objectives from the start with your financial planner, you can share them with your other financial advisors, even sending a group email so that everyone is on the same page and understands what the goals and objectives are, so they are all working to best serve your interests.

Accountability and transparency is the key

By sharing your financial plan with your accountant, financial coach and any other advisors, you are building a network around you that will ‘keep each other honest’. For example, if your accountant looks at the financial plan, and reviews your current income to deduce that there is simply not the expendable income to invest in such a plan – then this is something you can Zoom/Teams/Skype – or even face-to-face meet – with both professionals.

Although you may have teething problems at the start as each professional is undoubtedly going to try and position themselves as the ‘more important’, the fact remains – they are all working for you, so make them do just that.

How to manage your financial professional network

Sure, you may experience a clash of egos, conflicting ideas or even some heated discussions – however, it is paramount that you remember you are the client, it is your money, and you call.

As a good business manager would do, you need to keep every professional in their respective ‘swimming lanes’. Your accountant for example, is there to provide you with tax advice, work to minimise the tax you pay, maximise your cash for investment and ensure that you are accountable to the ATO.

Your financial coach is there to get your household budget and savings goals under control, while your financial planner is there to look at your future, how to invest in superannuation, investment funds and long-term initiatives to reach your financial goals.

All financial consultants are important to reaching your financial goals – but they must be transparent, accountable, and stay in their swimming lanes – if they don’t, you will have sharks in the water, and you are the little fish in the middle.

So, ensure you have a great team around you, expert professionals that understand your investment levels, your financial acumen and that their role is to work with and for you. The achievement of your financial roadmap is simply a journey to be enjoyed, not an arduous peak-hour commute.

Financial Planner vs Financial Coach

Jul 30, 2021 9:28:49 AM

Financial Planner vs Financial Coach

There is often confusion when it comes to the world of finance. It could be said in many circles that the people that created and derived many of the financial products and services available in the market did so in a confusing way so that only those ‘privileged few’ could understand what was going on.

This was no more prevalent than the ‘US subprime mortgage crash’ in 2008. Driven by financial instruments known as credit default swaps and then derivatives on those swaps, in simple terms, the crash eventuated after people bet on the outcome of a group of mortgages which were bundled together by a financial institution and sold off as a debt instrument – this sent the global economy into a freefall!

When it comes to starting out on your financial journey, it is important that you understand the difference between a financial planner and a financial coach.

What is a Financial Coach?

Ever found that you can’t get on top of your bills? Have a credit card or two that keeps spiralling out of control? When it feels like you might never be able to get out of a personal debt spiral, enter the financial coach.

A financial coach is there like a personal trainer, a football or netball coach, they are engaged to coach and guide you through your current financial situation, take control and make more constructive choices on how and where you spend your money in the future.

That is not to say that will take control of your money for you – although some financial coaches certainly do this as well – but they work on a budget, debt reduction strategies, saving strategies, reorganisation of accounts, and debt refinancing options.

A financial coach is most certainly your first step in your financial journey. Why? Because if you go into an appointment with a financial planner with no savings, high debt and no idea on why then you are more than likely wasting your time.

What is a Financial Planner?

Once you are feeling more on top of your finances, you have savings, and want to look into purchasing a property, an investment, planning for your retirement or setting yourself up for the future – then it’s time to meet with a financial planner.

A financial planner will review your current situation – which is now looking much better thanks in large part to your financial coach – and sets an individual roadmap to your financial goals and objectives.

This could be taking the plunge into purchasing an investment property through a Self Managed Super Fund (SMSF), looking into investing into financial instruments such as funds, bonds or other available vehicles.

Your financial planner is qualified and an expert in a wide range of investment options, setting up vehicles for you to invest into your future, providing access to funds and ensuring that your investment plan is panning out. If it isn’t, then they will recommend adjusting your strategies or investments.

Financial planners as well are governed by far more stringent rules, regulations and CPD requirements. They require an undergraduate degree, post graduate studies and ongoing CPD to provide you services.

If you are planning on getting a financial planner in the future, you could run some investment strategies past them to get their input. After all, the sooner you get financially stable and pay down your debt, the sooner you can engage them to invest on your behalf.

What does a financial planner do?

Jul 30, 2021 9:24:54 AM

What does a financial planner do?

Planners spend the majority of their time advising clients on the following: investment planning, retirement planning, tax planning, estate planning, and risk management 

There are many misconceptions on what the role of a financial planner does, by now we hope that you have a more robust understanding of their important role as part of your financial future.

In terms of what they do from a top-level as well, we have discussed in terms of their setting a roadmap for you, presenting a range of financial investment and superannuation options, and working with you to develop a plan to get out of debt and into a solid financial position.

However, when it comes to the day-to-day, what does a financial planner do? How does this benefit you as a client and why does it indeed matter to you at all?

Although a financial advisor may only sit down with you as a client for an hour, maybe two or three, by no means is this the end of their time spent on working on your account.

In order to do that proficient meaningful advice, they will need to meet and discuss your current situation or portfolio with your lawyers, your accountants, investment bankers (if you have one), fund managers and other financial service providers you may have working with or for you.

Even if you are only just starting your journey into getting financial planning advice and services, your financial planner will be researching your spending habits, financial acumen, ability to save, repay debt, debt levels and potential earning capacities.

All of the above is purely just researching into you, and then they will sit down and map out a plan, a schedule of advice and a range of products across a broad spectrum of financial instruments best suited to meet your financial objectives.

According to the Institute of Certified Financial Planners, planners spend the majority of their time advising clients on the following: investment planning, retirement planning, tax planning, estate planning, and risk management[1].

While a financial planner may undertake this for an extensive list of clientele, they also are required to complete ongoing CPD courses, attend seminars and conferences on financial planning, review and research fund, share and portfolio performance, all the while ensuring that their ‘funds under management’ are all performing.

Financial planning advice cannot be provided to you without the proper research and understanding of market variables that could impact your financial performance – and ultimately the time when you will retire, buy an investment property or go on a family holiday.

As such, your financial planner not only needs to understand the market, the products and services available and ensure they are compliant in every way, but they need to understand you.

As you can see, where many people may feel that financial planners are charging high fees for ongoing management of your affairs, they are highly skilled individuals that need a broad understanding of all financial matters, markets and legislation to ensure they provide you with the very best service.

[1] https://www.princetonreview.com/careers/176/financial-planner

Financial planner vs accountants – what is the difference?

Jul 30, 2021 9:20:13 AM

Financial planner vs accountants – what is the difference?

Financial planners, accountants, stockbrokers, bank managers, mortgage brokers … each has their own set of specific skills and can help you along your financial journey.

When it comes to investing in your financial future, there are many professionals that can help you on your way. Financial planners, accountants, stockbrokers, bank managers, mortgage brokers and then some. Each has their own set of specific skills and can help you along your financial journey.

However, there are some key differences to the skill set, advice and information that each of the above are able to legally provide you. Moreover, you as the ‘client’ have a fiduciary responsibility to yourself (as the end beneficiary of the next set of actions you take on your financial future) to understand where the services of one and the other interact, cross over and should be kept apart to maximise their effectiveness for you.

How are accountants and financial planners different?

We all know around July each year we need to start collecting our receipts, reviewing our car travel for work and book an appointment with an accountant to do our tax. Those who may run their own business understand that there is a lot more to accounting for small businesses, such as running regular BAS statements, business reconciliations, payroll tax submissions and much more.

In addition, if you are planning on purchasing a house in 1, 3, 5 or even 10 years, an accountant can make sure all your books are in order to achieve that. They can sign off your financial statements and submit information on your behalf once they have clarified it to the ATO.

Meanwhile, a financial planner is less transactional, less about what has been done in the last month, quarter, year or reporting period. They are more about planning for the future, your future.

Their services include recommending investment opportunities, diversification of your assets, planning for your retirement and setting yourself up with a plan for financial security into the future.

Why do you need both an accountant and a financial planner?

To use a sporting analogy, in the game of cricket you need a bowler and a batsman. Your financial future is no different, you can just have an accountant (bowler) putting your taxes in each year, ensuring that you are compliant and everything is up to date – in other words - bowling the ball down the pitch.

This is fine, you will do as you have always done, in fact, you will do as well as the majority of the population who don’t understand the true benefits of a financial planner.

However, if you add the batmen to the game (in this instance, the financial planner), they are there to take the information, situation and available options and provide an array of investment options (shots) that you can use to score runs on your financial scoresheet.

Accountants and financial planners are not in competition with one another, quite the opposite. They work with one another to review your current financial situation & compliance to tax (accountant), then use this with your future potential earnings, current risk aversion and a range of other factors (financial planner) to set the best plan out for you as an individual.

Surrounding yourselves with two financial experts – such as an accountant and financial planner – also has the added benefit of both having access to your records, and keeping each other accountable for their choice of investment opportunities, potential rewards, also if you have any reservations of one or the others service, you have the option to communicate this and seek independent advice.

Accountants and financial planners are both vital to your future financial wellbeing, the sooner you have both working together in your best interests, the better you will see your financial potential.

Financial Planners vs Financial Advisors with growth arrow

Jul 29, 2021 12:04:12 PM

Financial Planners vs Financial Advisors

A financial advisor will consult with your financial planner, they are looking at one-off transaction, whereas your financial planner is looking at the long term

There is no shortage of jargon in the financial sector, much of which many people may feel has been specifically designed to confuse laypeople. However, this is seldom the case as the industry is highly complex, highly specialised, and where people wade into the waters of the market without the property understanding, knowledge or advice, it can be extremely costly.

There are several key professionals that provide financial advice to you as individual investors, these include your accountant, stockbroker, financial planners and financial advisors.

Investors or “a person who has aggregated net assets of $2.5 million or has aggregated gross income for each of the last two financial years of at least $250,000 a year can be classified as a Sophisticated Investor”[1] They have a further range of investment specialists that deal in many off-market transactions that have much higher risk/reward variables.

So, when it comes to accountants and financial planners, we will discuss that later in this book, however, there is one area that people are often confused by definition – and rightly so – the difference between financial planners and financial advisors.

As such, we thought it pertinent to provide a definition on both, and how their services can provide you with advice and expertise upon your investment journey.

A financial planner is considered a ‘broad brush’ approach to your financial matters. They are looking at the long term, providing an ongoing service – starting with a financial roadmap - with what should be considered a holistic and comprehensive approach.

A financial planner’s role is to guide you through your ongoing financial journey, providing support and services to iterate your roadmap (financial plan) as life’s challenges present themselves along the way.

A financial advisor, even an independent financial adviser, tends to focus on a single problem. They don’t take into account the big picture. Instead, they look at the question narrowly, only advising you on what you have asked for.[2]

Advisors focus on how to invest a pool of money – such as an inheritance, windfall or other financial benefits, into a product as a one-off transactional approach. Within the narrow focus, they are looking for financial products – such as a real estate fund – that may not be available on the retail markets, but provide a solution to your short term need – ie: establishing 15% p.a returns on an investment of $250,000 over a maturity period of 3-years.

While a financial advisor will consult with your financial planner, they are looking at one-off transactions, whereas your financial planner is looking at the long term. It is also true that many financial advisors have regular communications with financial planners, so they are aware of the suite of products the advisor may have available at any given time.

The key differentiator is, however, a financial planner is long term and holistic, whereas a financial advisor is a short term and one-off. Both are required at different stages of your investing career; however, it is an important distinction on who is responsible for what and why in this your financial journey.

[1] https://www.morgans.com.au/private-clients/Sophisticated-Investor-Panel

[2] https://frazerjames.co.uk/financial-advisor-financial-planner-the-difference/

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