It’s all about financial strategies

[ September 03, 2015 ]

It’s all about strategies

Financial products on their own cannot achieve client’s goals. They only work if they are combined with financial strategies to create a financial plan. This means good financial plans are all about good financial strategies. The stereotypical SOA starts off with a statement that the client wants to retire comfortable and early, live well and travel far frequently. It then says words to the effect of “switch out of product A and switch into product B” and lists out reasons why the switch is in the client’s best interests and why product B is appropriate to the client. And if you do this all will be well…. Reading, I am at a loss to see how the switch achieves the client’s objectives. Even if product B does end up out-performing product A, the difference is unlikely to be much, and definitely will not secure the client’s stereotypical SOA dream retirement objectives. A SOA that focusses on financial products and ignores financial strategies has only low prospects of success. It may be compliant, and it may tick all the boxes for safe advice. But it’s not effective advice. For advice to be effective it must contain strategies. And strategies require behavior. Normally the required behavior is different from the client’s previous behavior. And if the client’s behavior does not change the client’s financial prospects will not change. That’s where it gets hard and where your skills as a financial planner come into play.

A youthful example

For example, we recently reviewed a SOA for a 25 year old tradie working with his dad. He had $30,000 in CBus. The SOA recommended he leave CBus and join a retail super fund, and allocate the $30,000 amongst 12 different sub-funds. The costs were higher, said the adviser, but were justified by the expected higher returns and the lower expected risk. Let’s assume the retail super fund outperformed Cbus, net of costs, by say 2% a year. That’s $500, or $425 after tax, compounding annually. Over time the difference will be…not very much, at least for many years. It’s extremely unlikely the advice, if acted on, was going to have a material effect on the young man’s retirement prospects. A better SOA would have de-emphasized product choices (probably shifting to CBus high growth option), kept things simple, easy and cheap, and instead opened the young guy’s eyes as to the financial opportunities in front of him, and the financial challenges he faces. What about home ownership? What about the ever rising cost of living? Family? School fees? Relationship breakdown? Support for elderly parents? Technology threats? Globalization threats? The list goes on. So what strategies are needed? Think about:

  1. further training to develop better skills, higher income prospects and greater employability
  2. reducing personal costs and investing the savings
  3. starting a new family business, or developing it further
  4. expanding the business from Melbourne’s eastern suburbs to Melbourne’s southern suburbs
  5. inter-generational support for buying a new home, possibly rented out to tenants to start so the tenant and the tax office help pay the loan off
  6. a home loan management strategy
  7. extra salary sacrifice super contributions
  8. a more tax effective car situation
  9. credit card management advice
  10. income protection insurance
  11. additional cheap life cover in CBus

This is not a complete list of the possible strategies that were not considered by the adviser. But each of strategies that were not considered probably generates more than an extra $500 a year benefit to the client. In combination, combined with some early asset protection advice and estate planning advice, they will probably generate tens of thousands a year. The SOA was compliant, and was duly certified as compliant by our compliance team. But it was not effective. It missed all the good stuff. And it probably won’t be acted on, and certainly won’t create any word of mouth referrals.

Another less youthful example

A less youthful example involved a fifty year old couple, as usual, hoping to retire early and travel extensively. As usual, the SOA suggested they switch from something like an MLC super fund to something like an AMP super fund, dutifully listed the case for the affirmative then ticked all the compliance boxes. The clients were very typical: they owned their home, worth $800,000 with a mortgage of $250,000, had two cars worth about $30,000 each and had about $400,000 in super. Once again, all product, no strategy. The SOA has nil chance of helping them meet their objectives. The difference between MLC and AMP, if there is one, will not be significant and will not make any difference to their retirement. The SOA is compliant, but it’s not effective. The strategies the SOA did not discuss included:

  1. further training to develop better skills, higher income prospects and greater employability
  2. reducing personal costs and investing the savings
  3. postponing the expected retirement date so they:
    1. have more time to build up capital
    2. defer the start of their capital draw
    3. have fewer years of 100% retirement to fund
  4. stop their home loan repayments, and pay a grossed up amount as extra salary sacrifice contributions, with a view to withdrawing the extra accumulation at age 65 and using it to pay off the $250,000 home loan (ie tax benefitted home loan repayment strategies)
  5. the need to start planning for the old age pension now.

Behavioural change

Financial planners are not psychologists. But like most professionals our work involves psychology. Psychologists will tell you adult behaviour is complex and hard to change. Habits die hard. Financial habits die harder than most. But you need to change behaviour to implement a new strategy. Sometimes the motivation will be there, but other times you have to create it. This is part and parcel of being a professional. Its where your skills as a financial planner come into play: allowing your client to see what is possible and resolving to do what it takes to achieve their goals. You will not always succeed. In fact you will often fail. The horse does not always drink the water, and clients will often not accept or apply your advice. That’s life as a professional. But at least your advice will be effective. And you will succeed far more often than will be the case if you ignore client strategies and only recommend financial products. And please never hesitate to contact me to discuss potential strategies for a client. I assure you my aim will be on your next thirty years, not your next thirty days.

The Dover Group