Financial Planning: The Future Unfolds
Good strategic asset allocation is like tailoring a well-fitting suit. Good tactical asset allocation and security selection is like weaving the suit’s fabric at a low cost. Both are important, but they are distinct. High-quality fabric woven at a low cost provides little comfort when it drapes a size 40 body in a size 46 suit. Financial advisors are tailors more than they are weavers; they are investor managers more than they are investment managers. But investors see more value in weaving than in tailoring. They are more willing to pay for investment management, with its focus on beating the market, than for investor management, with its focus on the examination of financial resources and goals, diagnosis of efficiencies, and financial education and care. - from The 93.6% Question of Financial Advisors, by Meir Statman, The Journal of Investing, Spring 2000
Investment Advisor - YES
Many persons are looking for investment management by professional investment advisors. When doing this, they are looking for higher return on their stock portfolio, higher return on their real estate, higher return on their mutual fund account, higher return on their insurance savings, etc. It is easy for a person to see the value of good investment management by professional investment advisors, and also to accept some charges for such advice.
Financial Planner – NO
Very few persons are looking for investor management by professional financial planners. Thus, very few people are willing to pay for this. The main reason for this is that nobody has been able to explain to them properly what kind of advice a financial planner actually can offer.
My experience is that good financial planning advice actually will add at least as much value to our clients as good investment advice will. But we have to be very good at explaining and showing persons not only the value of independent investment advice but also the importance and value of sound financial planning advice
Here are the important steps when planning for things like this:
1. Objectives - collect all the possible major objectives you have today. What do you dream of? What are your goals in life? When do you want to reach your goals? Make the objectives as clear as possible, i.e. not only that you want a house, but also the location, what it should look like, how much you would be willing to spend and when, etc. Then put them all on a timeline and make sure you understand the financial implications of these objectives taken together.
2. Strategy – What are the plans available if we want to reach our objectives? How much risk can you accept? Could you stand losing 10% in the short run? 30%? What kind of investment products are relevant for your goals and the level of risk you think you can handle?
3. Choice of investment products - the investment products are merely the tools that will help us realizing our objectives/plans. But you still have to figure out how to achieve a sound asset allocation, i.e. combination of different kinds of investment products, given your goals and strategy? And what kind of investment products would give you the best return at a risk you are willing to accept? Which are the best-performing investment products?
4. Execution of the financial plan – if we have made it through point 1 to 3 properly, we have a financial plan. Now we can start building wealth. But as with any aspect of real life, things will not always go according to our plan. This is perhaps very obvious when it comes to the financial market. Our investments will sometimes turn out worse than expected, sometimes better. We might want to change our assets for any of these reasons. Perhaps new investment products are available that we want to try out? We would also have to check that we still are in line with our strategy. Or have your financial needs changed? Perhaps even your goals? This would mean that it would be extremely important that we go through all these steps again.
Investment advice, yes please. Financial planning advice, yes please. An advisor at ALSTMD Wealth provides financial planning advice and investment advice.