Think about what sort of relationship you need with your financial adviser
Like a great many effective and self-aware people, he knew what he was good at – and he knew how to use the skills and talents of others in areas he wasn’t experienced.
In my role as a Financial Adviser I frequently meet with people who find themselves at a junction in life that requires experience and knowledge they don’t have. Typically, at this point they have come into some money, perhaps from an inheritance or they acknowledge they need to start putting money aside for their retirement. These people need the expertise of a Financial Adviser, but financial advice comes in different shapes and sizes. Giving thought to what sort of a financial advice relationship best suits you is a wise thing to do before going in search of expertise.
As a starting point financial advice can be broadly described as falling within three categories.
1. Execution Only — In this case you already have a strong view on what investment you want and you are looking for someone to help you purchase it. Your primary driver may be lowest cost.
To use an analogy, I liken this service with that provided by your local butcher. You know what you want, say steak, and he or she will be able to sell it to you at a given price. You don’t expect, or pay for, dietary advice from your butcher.
2. Investment Advice — Perhaps you have a specific sum to invest. You may have a defined timeframe and some thoughts on how much risk (variability of return) you will be comfortable with. You may want advice about the initial investment and you may, or may not, want to receive ongoing advice about the management of that capital and whether that investment continues to remain appropriate for your needs. This investment is likely to be just a subset of your total wealth.
To take the culinary analogy one step further. You have gone to an Indian restaurant and ordered a ‘mild’ Vindaloo.
3. Financial Planning Advice — In this case you are most interested in understanding if you are on track to achieve your financial goals – at what rate can you safely spend your savings or how much do you need to save to retire in style? The adviser will collect more detailed information about your current situation, assets and liabilities, risk profile, income, cashflow and future aspirations (e.g. anticipated retirement date and desired standard of living). Based on this information they will produce you a personalised plan that is likely to include cashflow projections and supporting investment recommendations.
The analogy isn’t perfect – but the advice of a dietitian that has developed a meal plan and an exercise programme is probably closest to this service.
The classification system I have described contains many generalisations, but I hope you can see the three forms of advice are very different in their composition. Of course, they are likely to vary in cost too in line with the time and level of advice expertise involved. In some cases clients may transition from one service to another. For instance, a client may initially just want investment advice but, as their situation becomes more complex, they may seek out financial planning advice.
I started this column by reflecting on the value of successful relationships. I am not suggesting that any one service is necessarily better than another — but I do think that putting thought into what service best suits you before going in search of it is likely to lead to a more successful and long-standing relationship with your financial adviser.
Peter Ashworth is a Principal of New Zealand Funds Management Limited, and is an Authorised Financial Adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily those of NZ Funds. His disclosure statements are available on request and free of charge.
First published in the Otago Daily Times on 11 June 2018.
