The Value of a Financial Planner
The Value of a Financial Planner
By Patrick Malcolm
The value of having a financial planner is often misunderstood. Our role in co-ordinating an individual or family’s wealth management needs by assisting with the accumulation, distribution and transfer of wealth, is complex.
The benefits from “good” financial-planning decisions are difficult to quantify. However, we believe that the full value of advice includes benefits such as preventing behavioural mistakes, portfolio rebalancing, planning and additional advisory services and investing tax efficiently.
Behavioural Mistakes
Everyone likes to think they make rational and logical decisions when investing. But researchers in the fields of psychology, economics and neuroscience cast doubt on that assumption. Over 200 types of unconscious biases have been uncovered that lead to decisions that can ultimately jeopardise wealth if left unchecked.
It is our observation that people tend to let their emotions influence their decision-making. That’s perfectly reasonable in many parts of life. But when it comes to investing, acting emotionally can lead to costly errors.
To invest successfully, it is vital to be objective and disciplined when making decisions. This means making sure that your decisions align with your long-term goals and objectives.
Investors often feel compelled to react to short-term market volatility, which can undermine their long-term objectives. Therefore, behaviour coaching is one of the most vital parts of the service that we provide.
We also observe that many investors buy high and sell low. It is our role to guide clients to avoid these behavioural mistakes.
Investors look for patterns in the stock market
Based on a study by Russell Investments in the US, the average equity investor’s inclination to chase past performance would have led them to underperform the Russell 3000® Index.
Investors withdrew more money from U.S. stock mutual (managed) funds than they put in from December 2007 to December 2018. Over that time, $100 invested continuously in the Index more than doubled in value. Those that chose to stay in cash over that period missed a cumulative return of more than 200%, based on the Index.
No one likes to think of themselves an average investor. But statistically, according to the Russell Investments study, the average investor’s inclination to chase past performance cost them 1.9% annually in the 34 years from 1984-2018. At GFM Wealth, our financial planners endeavour to ensure that our clients can become better than average, stick to their long-term financial plan that fits their goals and objectives and avoid irrational, emotional decisions.
What drives investors to select one response over another?
Whether an investor is inclined to hold their nerve or panic in times of market volatility depends on many factors. These include their investment objectives, including their tolerance for risk, return target, their belief about where the market cycle is and what markets will do next.
These factors (which are invisible to the market) can lead investors to come to contrasting conclusions, resulting in different behaviour and potentially opposing investment strategies (the only things visible to the market).
At GFM Wealth, our financial planners play a critical role in helping avoid common behavioural tendencies. This can help achieve better returns than those investors making decisions without professional guidance and alleviate the stress investors may encounter.
Cost of getting it wrong
Many things can go wrong when investing without seeking advice. An investor may lack the skills or time to filter through the many options available, the right investment strategy may not be set for their goals and objectives or they may overreact to market events.
A study has shown that investors often experience a disconnect between their risk profiles and their return expectations. The research from Deloitte found, surprisingly, that younger investors were more risk-averse than their older counterparts. Some 81% of investors under 35 said they were seeking guaranteed or stable returns, compared to 41% of those aged over 55. Also, 21% of the most risk-averse investors expected returns over 10%.
Therefore, the role of a GFM Wealth financial planner is to determine the best possible investment strategy and risk profile to meet an individual’s objectives. Whether the goal is to preserve capital or achieve long-term growth, without the right investment strategy and approach to risk, this cannot be achieved.
It is widely accepted that strategic asset allocation (the setting of long-term allocations between asset classes) is the most significant driver of long-term performance. Therefore, setting the correct asset allocation is a fundamentally important foundation for investment success.
In the below example, we look at average returns of a Growth and Moderate portfolio over 24 years to the period ended 30 June 2019. If an investor held 70% of their portfolio in growth assets and 30% in defensive (the Growth portfolio), their average annual return would be 8.21% p.a. over the 24 years. If, however, they held just 30% growth assets and 70% defensive (the Moderate portfolio), they would have achieved an annualised return of 7.05% p.a.
In this case, if an investor had invested in a Moderate portfolio instead of in the Growth, they would have missed out on an average of 1.16% p.a. return for 24 years. On $100,000 invested, that’s a significant difference of almost $151,000 to the final return. This is a high price to pay for getting a decision wrong.
At GFM Wealth, our financial planners bring the necessary knowledge and skills to construct a well-diversified portfolio of complementary investments, which is one of the most important contributors to long-term returns. Our financial planners also provide access to funds and strategies individuals may not be aware of or able to access themselves.
Portfolio Rebalancing
Portfolio rebalancing is the process of realigning the weightings of a portfolio and involves periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation.
It can be easy to underestimate the discipline of rebalancing and avoiding unnecessary risk exposure when investing. When a particular asset class is performing strongly, it is tempting to hold an overweight position. This can have repercussions if markets correct and investors find themselves with too much invested in a volatile asset class. An investment strategy that does not rebalance and drifts with the markets has experienced higher volatility in the past and is expected to do the same in the future.
Knowing when and why to rebalance is vital. At GFM Wealth, our financial planners have a deep understanding of our clients’ goals, objectives and risk tolerance, and are well placed to understand how often rebalancing should occur and what adjustments best align with current goals and objectives.
Planning and additional wealth management services
Good financial advice goes way beyond selecting investments and achieving a certain level of return. It should add value not only to an individual’s financial position but to their life as a whole.
At GFM Wealth Advisory, our financial planners continue to monitor the strategy set for their clients and ensure all aspects of their finances are considered, helping them stay on track to achieving their overall financial goals and objectives. We view our relationships with clients as a true partnership that grows stronger over time. We treat them as people, not portfolios. Our financial planners are regularly updating financial plans based on new or revised goals and objectives, conducting portfolio reviews, providing services such as tax, Centrelink and estate planning, cash flow analysis, providing guidance on realistic annual spending, assisting with tax return preparation as well as one-off bespoke requests.
The value of sound financial advice takes the form of both tangible and intangible outcomes. There are bound to be some aspects that are difficult to put a price on, but this comprehensive and holistic approach does provide enormous value over the long term.
Investing tax-efficiently
If there is one certainty in the advice process, it is that government policy—taxes, incentives and benefits—will be ever-present and ever-changing.
The number of retirees is rising rapidly, and many investors have both taxable and non-taxable investments. Furthermore, recent budget changes have increased the financial options open to retirees. At GFM Wealth, our financial planners can add significant value by ensuring that retirement spending is undertaken as tax-efficiently as possible, in this complex environment.
At GFM Wealth, our financial planners can add value through:
- Staying up to date on relevant tax changes;
- Considering tax-efficient investment solutions;
- Tax advice through superannuation strategies;
- Keeping a close eye on tax returns;
- Optimising tax for non-superannuation assets; and
- Working alongside tax and legal advisers to help clients meet their goals and objectives
At GFM Wealth, our financial planners not only have the technical expertise to help clients make the most of their circumstances but can also help to avoid any nasty surprises at tax time.
The super system in Australia was introduced by the government as a way for people to save for their retirement. Employers must contribute 9.5% of a person’s salary to super, but also, the tax-attractive structure of super encourages people to make further contributions. Given the tax advantages of super, many would benefit from holding all, or a majority of their assets intended for retirement there.
Over time, the difference in the balance is significant due to the tax head start of investing in super. An investor on the median income can invest 30% more each year through super rather than their personal name. However, the restrictions on withdrawal timing, contribution and balance caps, all of which are subject to policy change, need to be considered.
At GFM Wealth, our financial planners focus heavily on which structure an individual should invest. This is usually superannuation but could include trusts, companies and investment bonds depending on an individual’s circumstances.
And, just as there is strategy in tax efficiency, optimising the receipt of government benefits such as the Age Pension can significantly improve the standard of living in retirement for an eligible household.
The bottom line
At GFM Wealth, we have an unwavering, strong belief that our financial planners can make a big difference to clients’ lives.
Our financial planners provide the knowledge and expertise required to build personalised portfolios, support when market conditions change, as well as offer a range of additional wealth management services on an ongoing basis.
Many of our clients have been with us for well over 20 years, with some even over 30 years or longer. Significantly, most of the growth in our business resulted from client referrals made by our satisfied clients.
Our core value is that our clients are our business. Our financial advice is tailored to each individual’s unique needs, risk profile and investment preferences with a focus on ensuring they receive the very best advice based on their goals, objectives and best interests.