Myth busting for Financial Planners

ARTICLE BY KOBUS KLEYN CFP®

There  are many myths that financial planners – and all financial advice givers – encounter when navigating the financial services environment. We need to make sure that these myths are ‘busted’ in order to have successful interactions with both existing clients and prospects. In this article I share and debunk some of these long-standing myths, both from an advisor and a client perspective. This article appeared the first time in FIA Insight Magazine Q 4 (2016).

Myth #1 – Financial advice is not affordable

There is an international myth – in countries where Retail Distribution Reviews (RDR) or similar regulatory interventions have hastened the move to fee-based advice models – that financial advice is unaffordable. As we align ourselves with the Financial Services Board’s RDR, South African financial advice professionals would be well advised to proactively address this misconception.

It helps to explore this from an individual client’s perspective. With a financial planner at your side you can work through your budget and your investment portfolio to see how you are spending and saving your hard-earned income. You will be able to conduct a thorough and informed review of the premiums you pay for life assurance, healthcare insurance and short term insurance policies and benefit from advice on how to reduce these premiums without exposing yourself to undue risk.

These savings often more than offset the fee that you pay for the professional service that your financial planner offers. Your financial planner can also advise on the allowable tax deductions that you can utilise towards fees for services offered. There could also be significant savings over the longer term to your estate planning with good use of section S 4A and S 4Q;  the use of trusts; and many more advisor-led interventions.

Making advice more affordable

Financial planners have various remuneration models which they can put on the table to make advice affordable. These models can take account of the commissions embedded within future product sales; ongoing fees as a percentage of assets under management; fee-based advice for the financial plan; recurring monthly retention fees or a hybrid model combining any of these. The eventual remuneration ‘mix’ will depend on which category – restricted or non-restricted – the planner operates within.

To end this part of the discussion I must add that financial planning is not only for the wealthy. It is a discipline that can be directed at people from all income groups. The vast array of remuneration models ensures that any client or prospect can benefit from affordable advice tailored to his or her needs.

I therefore consider the ‘financial planning is not affordable’ myth busted as there is no doubt that a financial advice professional will add holistic value to your financial plan. You in turn will benefit by way of a handsome return on your fee investment – even more so when you consider that the fee need not impact negatively on your current cash flows. 

Myth #2 – All financial planners are the same

"The belief that potential clients can pick any financial planner out of a hat and have 100% confidence that the advice they subsequently receive will be a perfect match for their personal needs and circumstances is frightening."
I remain astounded by how prevalent this myth is! The misconception centres on the poor understanding of advisor categories and is one of the key drivers of the advisor categorisation focus in the RDR. The bottom line is that professionals have different skills, expertise, qualifications, designations and compensation. The financial advice profession has levels of ability in much the same way that the medical profession distinguishes between GPs and specialists.

A financial planner could choose to specialise in a niche advice discipline; offer holistic financial planning advice; or become a product seller for a particular financial brand – or any combination of these. The mix of services offered by the advisor will make a big difference in the type of consumer seeking his or her advice and on the eventual advice outcome.

Finding the right planner is an imperative and there is no better place to go than the FPI (www.letsplan.co.za) to find someone that is a match for your financial needs, or to simply check out the referral you have received. You can turn to the FPI’s list to find an ethical and professional financial planner who is bound by South Africa’s world class financial services regulation and committed to giving you the best possible financial advice.

There is no truth in the notion that your financial planner’s credentials are unimportant. On the contrary the letters which designate a financial planner should be considered – they can assist you in matching the advisor to the type of financial advice that you are looking for. One of the best known credentials is the Certified Financial Planner (CFP®), but you can add CFA (and international credentials such as CPA and CLU) to the list.

"Each of the above credentials indicates that the planner has expert financial knowledge across a wide spectrum of financial planning disciplines. They also show that the planner has passed a comprehensive board exam which tests his or her ability to apply theory to practical financial planning techniques."
Let me make it clear that these credentials are not a guarantee; but rather a good indicator that you are engaging with the right planner. I should also point out that there are many great planners with no credentials who have years of experience that cannot be bought ‘off the shelf’. I therefore consider the ‘all financial planners are the same’ myth solidly busted.

Myth #3 – Financial planning is a once-off

This myth is creating some serious advice gaps in the financial sector. Financial planning cannot be viewed as a project with a set timeline and is definitely not a once-off exercise. It is a long term process in recognition of which I refer to the discipline as ‘financial life planning’ – a process that spans all life stages and involves whole-of-life advice and planning.

Appropriate long term financial planning will take account of life events such as career changes; matrimonial changes; the birth of a child; health issues; the impact of the economic and investment environment on investments; estate planning; and so much more. It will also accommodate unexpected events such as dying too soon; living too long; critical illness; and disability.

We must view financial planning as a long term process that adapts to the clients’ needs at each life stage. And for this reason the client should ensure continuity by appointing a financial planner with a succession plan in place. The ‘financial planning is a once-off’ myth is therefore easily busted. 

Myth #4 – Financial planning must be holistic

The above myth is an unintended consequence of the pro-consumer stance adopted by financial sector regulators. There is no doubt that financial planning should be holistic to ensure that all decisions reflect in your long term plan and to avoid negative outcomes. But an unquestioned belief that planning must be holistic can also lead to significant advice gaps.

An experienced and qualified financial planner is well equipped to deal with so-called ‘single need’ situations that arise following retrenchment; inheritance; the rollover or maturing of an investment; purchasing immovable assets; drawing up the last will and testament; and so many others.

Each of the above events could impact on a financial plan; but ‘single need’ advice – if taken – can be incorporated into future financial planning consultations as necessary. Indeed we can bust our fourth myth by saying that it is not an imperative that all financial advice be part of a full or holistic financial plan.

Myth #5 – Financial planners are not needed for advice

One of the most dangerous myths within the financial services sector derives from another myth, namely that advice is unaffordable. There are many financial consumers who are confident enough to make their own financial decisions; but I have only encountered a handful whose financial planning is top notch. For the most part these are individuals who have been employed at one company for 30 or more years.

Upon closer inspection the opportunity cost in going it alone is plain for all to see. A financial advice professional will have elevated the aforementioned (and apparently successful) DIY financial plan from an acceptable retirement with a 70% replacement ratio to one of 100% or better.

Such opportunity arises from the expertise that the financial planner brings to the planning process in so far knowledge of tax legislation; investments; financial products; and estates as well as his or her ongoing education on financial planning methodologies.

Recent studies have shown that a professional financial planner can add between 3% and 5% in return per annum – when you compound this over three decades it makes a staggering difference. All financial clients need financial planning expertise over the long term, which means that this myth is also busted.

Myth #6 – The IFA is independent

This myth has developed over many years and has risen to the fore locally as part of the RDR discussion on advisor categorisations. What makes things worse is that the myth has been perpetuated by independent financial advisors (IFAs) themselves.

"It is not surprising therefore that the latest RDR proposals could see the IFA category fall away with the word ‘independent’ being more clearly defined to ensure that it cannot be misrepresented."
There are still true IFAs out there; but here I refer to financial advice professionals who make a pure living from giving advice based on a financial plan that is drawn up on behalf of the client in return for which they receive either an hourly fee; fixed-plan fee; or recurring retention fee for ongoing consultations on the plan.

Such IFAs have no interest in selling a product or investment apart from making recommendations as to what products or investment types match the plan. There can also be no reference to product suppliers, no referral system and no association with third parties to satisfy the ‘independent’ test.

This arrangement ensures that there is no conflict of interest or undue influence of any kind and makes such a person a truly independent planner. To be a truly independent planner is one of the toughest jobs out there as you are entirely fee based. You have to operate within the right niche market where the affordability of such advice is not a problem.

The whole-of-market pipedream

Any financial planner who is unable to give whole-of-market advice (absolutely impossible) or who is related to another FSP (via a consultant code or the FSP holding one) cannot claim true independence – and it would not matter if there were minimum targets and service levels or not.

The Financial Planning Institute refers first and foremost to advice as part of the financial planning process and does not differentiate between restricted and non-restricted planners. The reason for this is that a consequence of professional financial planning may be the recommendation and selling of financial products, with the caveat that this outcome should not be driving the advice and planning process.

I hope you find value in this article and urge you to share it with your colleagues and clients alike. Let us work together to debunk the many financial planning myths that I describe above and to focus on giving professional financial advice to both our clients and prospects at all times.