What is Financial Planning? And Why Does it Matter?

Rather than the day-to-day battle to balance the books, a financial planner can hopefully take you on a journey towards financial independence

James Gard 13 November, 2023 | 10:37AM
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“Financial planning” has become a mainstream phrase in our industry and it has a certain simplicity. The phrase certainly sounds positive enough; in a world of increasing complexity and risk, whose finances wouldn’t be improved by a plan? But this apparent simplicity masks some common misconceptions, not least in the way financial planning has become fused in the public’s mind with financial advice.

Let’s start with first principles: financial planning describes a relationship between an adviser and client with the idea of building wealth for the future and making contigencies for life’s unexpected events happen. It’s meant to be an ongoing and dynamic process rather than say a one-off event such as finding a cheap mortgage or calculating a tax return. Those examples would involve a mortgage adviser and an accountant, who would generally expect a single fee rather than an ongoing annual one.  

The Financial Planning Standards Board (FPSB), which certifies financial planners, defines financial planning as a six step process. For brevity I won’t list all the steps but they involve working out what the client’s goals are, their risk attitude and tolerance, producing a written plan and implementing it. Then regular reviews, perhaps annually, can make sure the client is on track to meet their goals. This plan can then be adjusted as the client moves from the accumulation (working, saving) phase to decumulation, when you start drawing down on your assets.

From the planner’s point of view, this could be a lucrative and long-lasting relationship taking the client through their life stages: buying the first home, paying for children’s education, preparing for a comfortable retirement and making sure there’s enough money to provide for care in the last stage of your life. Perhaps that’s the future of financial planning – and Morningstar advocates starting engaging with your money as early as possible – but most advisers I speak to say their average clients generally come to them after 50 years’ old and need help maximising their pension. A common question asked of the advisor is “when can I retire?” and the answer is often “it depends”.

Many often offer a free “no commitment” consultation where you can get to know each other; like all one-to-one services, you may not get on with the person and decide the process (or person) is not for you. Talking about money is often the hardest thing we have to do, and that level of trust takes some time to build up. As financial planning generally works on an annual fee basis rather than commission, a planner would like a multi-decade relationship. But a client might want different experts over their lifetimes as their priorities change. It seems an obvious point, but when you take on a financial planner, you’re not committed to that person for the rest of your life.

All Financial Needs?

People often say “financial planning” when they mean “financial advice” and vice versa. It’s important to distinguish what’s different between them and why this distinction. The Chartered Institute for Securities and Investment (CISI) administers the Certified Financial Planner certification programme in the UK; it says that financial advice is often more restricted to areas such as protection and retirement planning. In reality, your financial planner may identify you need help in one particular area rather than every aspect of your financial life; it often depends on what’s a priority now. A firm may employ IFAs and planners, as well as paraplanners and mortgage advisors – this type of company is likely to be regulated. (Later this week, we will be looking at regulation and qualifications.)

Financial planning covers “all financial needs”, according to to the CISI, and these needs change over time. Buying a house is a hard enough challenge for those who want to get on the property ladder, but often the biggest challenge of all is to make sure you have enough money to last you in retirement. So it’s natural that a planner’s resources are often focused on this area. But equally you can look ahead to what might happen to your finances when you’re no longer around. Estate planning is becoming more important as house prices rise and more people are exposed to inheritance tax. A planner can also help you deal with an unexpected windfall.

What will a financial planner ask you? As well as the factual data about salary, assets and circumstances, they could ask you more searching questions about your life goals, where you see yourself in 10, 20 or 30 years’ time? What kind of retirement do you want? What future do you envisage for your children?

These are BIG questions and ones that most people struggle to answer in an online questionnaire or quick Zoom session. This is why financial planning is seen as a long-term process.

This week at Morningstar, we will look in depth at the various aspects of financial planning and advice, regulation and qualifications, and why people may still be reluctant to engage a professional to help plan their future finances. And as always, we will offer up tips for how to do some of the planning yourself, too.

James Gard is a member of the CISI.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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James Gard

James Gard  is senior editor for Morningstar.co.uk


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