As we have clearly outlined throughout this Walker Capital eBook, the risks (and costs) of not working with a financial planner are far greater than that of working with one.
The missed opportunities, how as little as $100 per month into a managed account could one day give you a $280,000+ nest egg, or how much you could benefit from a self-managed superannuation fund (SMSF), changing your insurance providers or investing into a fund.
Like almost everything in life, there are most certainly risks being aware of with working with a financial planner.
Investment Losses
No one likes to lose, but that is a fact of the financial markets – which people call efficient for just that reason, some people win, and some people lose.
However, one of the risks of working with a financial planner, is just that. You invest your money into a portfolio, fund, property, shares or other alternative investment vehicle and it loses value.
Spare a thought for people who invested in cryptocurrencies like Bitcoin, put their SMSF money into it, when it seemed it could climb to astronomical heights – only for it to fall from over $86,179.29 to $45,780,98[1] as at the writing of this article.
That is a loss of over $40,000 in just a matter of months, or 46% of your total investment! Sure, some lucky people bought these coins for under $1 and are enjoying the spoils – but they are speculative. For more information on Alternative investments, please see the Walker Capital Alternative Investments eBook.
So, back to your potential risk of investment losses while working with a financial planner. As the client, you need to be very clear on how high your risk tolerance is, how much you want to diversify your portfolio and the types of investments you are prepared to make.
Irrespective of how safe a company may look, or how solid an investment may look, there are always externalities such as macro-environmental factors that are well outside your control – such as the GFC in 2008 and COVID-19 in 2019-2021 that may incur losses to your portfolio – so be warned.
Clinging to failed strategies
As Kenny Rodgers in the classic tune The Gambler said, “you need to know when to hold them, know when to fold them”. Although he was refereeing to cards in a card game – your investment portfolio in this respect is no different.
You and your financial planner need to have a candid conversation when it becomes apparent that failed strategies have been implemented and losses have been incurred by your portfolio.
Clinging to failed strategies is risky business, hoping they may turn around. For example, investment in property funds, in which the fund manager keeps saying “The development is coming, we are just waiting for some more capital”, despite your prospectus document stating the building should have been paying you annual returns for the past 2 years, and in fact, the building should have been constructed by now!
There are signs outside of simply losing money when it comes to your investments, where you should cut your losses and move one. And although a bitter pill to swallow, you as the client need to be strong and do so.
Life Event Risk
There are only three sure things in life, birth, death and taxes. As such, as an investor, trader, planner or simply a person wanting to set themselves up, you need to be prepared – life happens.
This is not always a negative risk to your portfolio, despite being at a great personal detriment, you may experience a financial windfall when a parent or loved one passes and this needs to be factored into your portfolio.
But you also may have started out your financial journey as a single working person, got married, had children and so on. As your life progressed, you may like one third of Australians get divorced, then remarried, and create a new family. So, in essence, life happens, and it is important to be prepared.
There are many risks with anything financial, but the greatest risk is to push through life, only thinking of the weekend, the here and now, then to get to the end of your working life with no nest egg, a mortgage and no passive investments to supplement your income when you wish to slow down.
Plan to succeed, and even if you encounter the above-mentioned risks, you and your financial planner have the skills, expertise and options to set a new plan in place and move forward.
[1] https://www.coindesk.com/price/bitcoin viewed at 1.28pm 30.06.2021