Paul Armson: How standard financial planning can fail clients
By Paul Armson
I am often asked what the difference is between financial planning and lifestyle financial planning. It is a question I love to answer by relating a true story.
Imagine the scene: two advisers, both seeing the same married couple as potential clients. Adviser A is a highly qualified (chartered and certified) financial planner. Adviser B is not yet qualified as chartered or certified but is a big believer in lifestyle financial planning.
The clients, Margaret and John, are aged 58 and 59. They are both in stressful public sector jobs, each with a good income and final salary retirement benefits. They have no children.
Their existing savings of £300,000 are held in various building society deposits and a hotchpotch of Isas. They have surplus income of around £20,000 per year.
They realise they need some advice about their accumulating money and forthcoming retirement and a friend recommends they visit his adviser. What happens next?
Adviser A conducts a first meeting with John and Margaret. After confirming the reason they have come to see him, the adviser provides an introduction of himself and his firm, an explanation of his qualifications and an overview of his charges (3 per cent reducing to 1 per cent upfront and 1 per cent per annum thereafter). His questions are then mostly focused on identifying the assets available for investment.
The adviser explains his firm’s investment philosophy (passive) and why Isas should continue to be the most obvious choice for their investments going forward.
He explains he needs to assess John and Margaret’s attitude toward investment risk, and identifies them as medium risk investors, helped by the security of their final salary pension benefits.
On further explaining his charges and investment philosophy, he proposes he goes away and produces a financial plan with his recommendations. The couple agree to this.
A week later, Adviser A meets John and Margaret again, this time armed with his financial plan. It consists of a full breakdown of their current investments, a comparison of past performance and charges for each existing holding, and a detailed recommendation for the new portfolio. This involves consolidating all their money into a passive investment portfolio on the adviser’s wrap platform.
Adviser A explains in further detail the benefits of a passive investment approach, focusing on the low charges. He explains again his adviser charges and asks John and Margaret if they would like to go ahead.
Having nothing to compare against, John and Margaret believe they are getting good advice and agree to do so, with the proviso they will initially invest just £100,000 to see how the adviser gets on compared to some existing holdings they will retain for comparison purposes. Adviser A transacts the business efficiently.
Over the next 10 years, Adviser A revisits John and Margaret to top up their Isas just before the end of each tax year, using the same investment philosophy, the same wrap and with the same fixed charges of 1 per cent per year. A little rebalancing is done annually to ensure the investments stay in line with their risk profile.
Adviser A is happy with the arrangement. He classes John and Margaret as good clients and is on course to build his firm’s assets under management by around £400,000 over the next decade thanks to them.
What’s not to like?
Adviser B conducts a first meeting and, having no major qualifications to shout about, does not waste time talking about them, his investment philosophy or charges.
Instead, he tells John and Margaret he is grateful for the opportunity to meet and explains that, while he has been of great benefit to their referral friend, he cannot guarantee at this stage he will be able to be of benefit to them.
He explains how he works differently to most advisers. His philosophy is that, until he knows about his client and their life, he has no right to talk about their money or tell them what to do with it.
The purpose of the meeting is to find out more about them: about where they are in their life (their current situation), how they got to where they are (their story) and then to understand where they are trying to get to in the future (their objectives). In particular, what sort of lifestyle do they enjoy now and what is their desired future lifestyle?
He explains that, in the course of the meeting, John and Margaret will get to learn a little about him and how he operates so that they will be in a position to decide whether they would like to take things further. John and Margaret agree to proceed knowing they can walk away.
The adviser explains he will be going through his confidential financial planning questionnaire so they can make the best use of their time together. He reassures them that, if they do not wish to go any further at the end of the meeting, they can have the questionnaire back and destroy it. They agree, again feeling under no pressure.
Adviser B now has permission to start asking the questions he wants to ask. Unlike Adviser A, these questions are not about John and Margaret’s money. Instead, they are all about John and Margaret: their life, work, hobbies and interests. What do they want more of? What do they want less of? What do they like? What do they dislike? What sort of life do they enjoy? What do they want to do in the time they have left on this planet?
John and Margaret are amazed there is no talk of financial products. It is all about them. They relax and tell Adviser B all he needs to know. While talking about what they want less of, they explain how stressed they are at work, how they both hate their jobs and cannot wait to retire, which, sadly, was still several years away. They talk about their home and intentions to downsize to somewhere cheaper in due course.
The adviser easily finds out about all their assets, their incomes and about a forthcoming inheritance Margaret is due.
Using a short but engaging presentation, Adviser B then explains his lifestyle financial planning service: how it works, how it helps them see where they are heading financially and, most importantly, whether they are on course to run out of money or die with too much.
He explains he would like to produce a comprehensive financial plan. The initial cost for this will be £2,500 but, as John and Margaret may not fully understand financial planning until they experience it, this comes with a guarantee that when he presents the plan at the next meeting, if they do not feel they have benefitted in any way, if they do not find it useful, then they need not pay the fee.
There is a catch, however. As part of the bargain, John and Margaret will need to complete his comprehensive expenditure questionnaire to help identify the cost of their current and desired future lifestyle. John and Margaret happily agree.
Over the next two weeks, Adviser B and his paraplanner prepare a comprehensive financial plan using financial planning software incorporating detailed cashflow modelling.
John and Margaret’s next meeting is their “financial planning” meeting. Again, this is not to discuss investments or products. It is about planning focused on their life and their financial future.
Using prudent assumptions, and allowing for all current and future inflows and expected expenditure requirements, Adviser B graphically shows them how they are on course to go to their grave with way too much money – if they work until 66. Remember, they have no children to leave money to.
He shows an alternative scenario, again based on conservative assumptions. In this one, they can comfortably retire now – seven years early – without fear of running out of money.
They currently have a good lifestyle but it is quite low cost, hence their surplus income. The plan can include more expenditure on travel and hobbies over the next 10 years while they are still fit and able.
John and Margaret are amazed with the clarity and peace of mind Adviser B has provided and how his entire focus has been on helping them get the life they want. They are excited about engineering an early exit from their stressful jobs.
They understand all their assets need to be aligned and working to achieve the objectives of the plan. Without hesitation they agree to invest all their money and future inflows, such as the inheritance and house downsize, with Adviser B.
Adviser B has exactly the same wrap platform, investment philosophy and charges as Adviser A, but in doing a little more work and asking more client-focused questions, he now manages five times more of his clients’ wealth.
But here is the sad news: John and Margaret did not know about Adviser B until it was too late. Several years after starting to work with Adviser A, John found out he had a Glioblastoma (Grade 4 astrocytoma brain tumour) and just six months to live. I went to his funeral.
Sadly, they never realised they could easily have retired five years before and avoided the stress of their jobs. They could have been living life to the full instead of wasting what little time they had left together working in jobs they hated. Had that stress been removed, John could still be alive today.
I believe Adviser A failed his client. He also failed the financial planning profession. What do you think?
In order to build a trusted profession, financial planners need to step up to the mark. We need to do more than change our job title from financial adviser to financial planner. We need to do more than gather qualifications. We need to deliver financial planning. Proper financial planning focused on clients’ lives, not just their money.
Paul Armson is founder and chief executive of Inspiring Advisers, and co-founder of www.lifecenteredplanners.com