The Value of Financial Planning

The Value of Financial Planning

There’s a lot more to comprehensive financial planning than just putting together an investment portfolio. However, the performance of a portfolio is often the only benchmark of the ‘value’ of financial advice. But investment performance does not account for the other benefits which accrue from receiving comprehensive financial advice.

Giving someone a comprehensive financial plan significantly improves their emotional and financial well-being. It makes them more likely to achieve their financial goals and gives them greater confidence that their retirement plans are on track.

In a three-year survey of 15,000 Canadians those with comprehensive plans scored higher levels of satisfaction and well-being on every positive measure than those who had received only limited advice, or no advice at all. Those with no advice fared significantly worse.

Among the comprehensively advised 81% felt their retirement plans were on track, compared with 73% of the limited-advice group and just 44% of the no-advice group. 60% of the comprehensively advised felt they could handle a financial shock, compared with just 28% of the no-advice group.

This value is overlooked when the focus is solely on investment returns. Meanwhile, as more people adopt passive investment strategies the investment performance is increasingly in the hands of the market, removed from the adviser’s influence. Few advisers today promote themselves on their skills in ‘picking’ stocks or mutual funds to invest in.

The financial advice industry has not yet arrived at a simple, agreed story of the value it brings by giving advice, versus running money in investments. But there are some common themes emerging.

The first theme is that the adviser is bringing an expert professional knowledge of the process to follow to arrive at a robust comprehensive financial plan. They know the areas to be considered; the questions to be asked and what to do with the answers. This knowledge is difficult to obtain, requiring the adviser to undertake extensive study.

Most people could not begin to do the job of an adviser as well for themselves, as all that expert knowledge is missing. So, there is value in bringing that expertise to the table, that clients will pay for.

The second theme of discussions is seeing the adviser as a financial coach and, perhaps financial counselor.

As a counselor the adviser takes time to really know their client — to understand their goals, circumstances, and personality. The creation of the financial plan is a collaborative process as the adviser helps the client explore their objectives and alternatives.

Most people remain very tight-lipped about their financial lives, leaving them with few people to talk to about money and financial decisions. The adviser’s role as that ‘other voice’ is of great value for clients, particularly given that it is an expert voice.

As a coach, the adviser holds the client to account on their obligations under the financial plan and helps them map their progress toward their objectives. Along the way, as circumstances change, they can revise the plan to make sure it is still suitable. Again, most people won’t have these conversations with friends. They need a professional ear and expertise and there is value in both things.

Reports by Morningstar and Vanguard suggest the value of advice alone – removed from investment performance – ranges from 1.5% to 3.0% per annum. This value is delivered through strategies including asset allocation, rebalancing, withdrawal sequencing and behavioral coaching.

But it is proving challenging to put dollar amounts on the value of expert knowledge on how to proceed, the counselling skills to make it work and the coaching skill to see it happen. For example, 74% of advised clients in the Canadian study felt they could afford an annual holiday, whereas only 44% of the non-advised were confident they’d have an annual vacation — but how is that to be captured in a fee?

The advice industry is at a crossroad. Behind it lies a history of charging a fee for delivering investment performance — ahead lies a future of charging for advice. Between those two worlds many advice-firms are, today, built around percentage-of-asset fee models — which look increasingly out of place as the emphasis on investments fades and the ‘softer’ skills around relationship, understanding and counselling emerge.

I have been using FinaMetrica for over 17 years for onboarding new clients. They like the extensive value of the reports; but what we appreciate is the innovations in technology, the value of the client-facing materials and the development of the life-long client relationships as I get to really know their behavioral tendencies. FinaMetrica has assisted me in building a very successful practice and we highly recommend it for any advisor who wants to enhance the overall value of their client relationships.

Ron Wilkinson - Portland, Oregon, USA
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