Having been in this business for more than 25 years, I have witnessed a significant number of ideas, strategies and “flavour-of-the-month” style products. I have met a range of clients – some who understand our role as financial planners and some who do not. And I have experienced the full spectrum of market highs and lows, as well as the client emotions that come with them.
During those years I have gathered a few foundation cornerstones that I have built this business on. Here are the Top Five.
Never lose sight of the most important role that we fulfil
Our single most important role as a financial planner is to protect the lives, the lifestyle and the livelihood of our clients and their families. If this is the only service that we provide for our client, then it is an immeasurably valuable one.
1. Without a comprehensive personal risk portfolio consisting of income protection, life cover and trauma insurance, our clients risk losing:
– their primary income source; and
– their future ability to earn an income
But they ultimately risk losing the lifestyle of their families that they have established and developed over several years.
As an industry, I believe that we must go back to the fundamental art of personal protection and really focus on delivering this crucial service to our clientele.
2. Be clear on the aspects of the investment plan that we can control
The media frenzy and the seemingly endless reporting of the global financial crisis is a test for all of us. It challenges the very fundamentals of investing and investment planning.
Long ago, I decided that market timing was virtually impossible to achieve and something that was not really a value add for clients. Human nature is such that even if you provide a client with a “winning tip”, they will likely cash in for a profit and ask, “What’s next?”. Ultimately, you build yourself up for failure at some future point.
As planners, I feel that the primary aspect we can control within investment planning is asset allocation. Clearly nobody can reliably control return. So asset allocation is where we invest a considerable amount of time with our clients. They need to understand and have buy-in to our investment philosophy, and embrace the risk/return fundamentals of markets. From here we work with them in identifying a portfolio mix that is appropriate for their individual needs.
Lastly, rebalancing at review time ensures that our clients remain on track.
3. Risk tolerance is a moving target
My experience is that you do not “know your client” after one or two meetings. Nor are you likely to know them after one or two years. Realistically it takes a full business cycle to fully understand a client. This is because you are able to see how they respond to the market emotion extremes of fear and greed. Specifically, are they influenced by short term market noise, or are they capable of keeping their own objectives in focus?
For this reason, identifying the risk tolerance of a client is difficult. As their planner, we need to be flexible enough in our advice and portfolio construction to acknowledge that a client’s risk tolerance may change along with their time horizon.
4. The client drives their own bus
There are many strategies that may appear on the radar when developing a financial plan. Some are more obvious than others and some are complex, requiring detailed explanation.
I see that our role is to thin out the strategies from the pool of all possible strategies and deliver an “option one or option two” approach wherever we can. It is completely acceptable to have an opinion and a rationale as to why we feel, for example, that option two is superior; but the point is that the ultimate decision lies with the client. If that means option one, two or even three is selected, then it is simply the client selecting the best solution for them. So always let them drive, because it is their bus.
5. The simplest rules are often the best
I am regularly asked about how I source clients. The truth is that I do not target retirees, specific professions, industries or suburbs. Our clients come from many different walks of life. In order for our business to take them on board, they need to demonstrate two important criteria:
1. An understanding of what we do – and just as importantly, what we don’t.
2. A capacity to save; whether it is now or in the future. From here, I explain the three-bucket theory, whereby out of every $1000 earned (gross), a target minimum of 15 per cent is saved and split across the buckets.
– The first bucket represents the shorter term liquidity needs.
– The second bucket is used for investment planning that may have a target time frame or material objective.
– The third bucket is for their own retirement as well the protection of their children and grandchildren. It may also include estate planning measures, such as charitable giving.
By adopting and committing to this rather simple premise, we provide options for our clients over all time frames. And having several options in life is by far the preferred option!
