May 12, 2020

Financial planning versus financial advice

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What is the difference between financial planning and financial advice? A little over nine years ago a new personal financial qualification, the Graduate Diploma in Financial Planning was introduced by University College Dublin in conjunction with support from the Life Insurance Association, the Institute of Bankers and the Institute of Taxation. Those who successfully completed this program were then able to sit a further exam with a view to obtaining the international accreditation Certified Financial Planner™ (also referred to as CFP®). This accreditation is regarded as the leading international standard for financial planning.

For the uninitiated, especially among the advised public, this might seem like a “so what” statement. After all most people in Ireland, and indeed worldwide, might deem that they have been satisfactorily served by those that they have purchased financial product from whenever they needed it. As we get older, our focus becomes less short term and more long term. That is the difference between financial advice and financial planning.

If we need finance to purchase a family home we get a mortgage. If we need life assurance cover to protect our family we buy a policy and if we need to start a fund for retirement we set up a pension. The advice is to purchase product and indeed most financial advisers operate in the product sales arena.

If, however, you want to find out if the mortgage will put a strain on your long-term finances, whether the life assurance cover is adequate for the lifetime of those that it is intended to protect or if you’ll have sufficient funds available to you in retirement including long term care, then a different approach is needed. And that’s where financial planning comes in.

Financial Planning is the process of developing strategies to assist clients in managing their financial affairs to meet life goals. This is the real difference. Product purchase is a tactical matter and is, in a way, gap filling.

Financial Planning involves reviewing all aspects of a client’s situation across a wide range of financially related activities, including inter-relationships among often conflicting objectives. These objectives range from the need for long term financing of old age and future health against the short term need for either personal enjoyment and or the financing of borrowings. The latter aspects are the short-term gaps that we are so used to dealing with in our daily lives.

A few Irish advisers do both – look at the real long term needs as well as solving the short-term problems. But not many advisers operate in both spaces at the same time. The main reason is that it is easier from a workflow perspective to deal with an immediate need and earn immediate income. Long term financial planning on the other hand is, in truth, a drawn-out process which can take months for clients to really focus on what is really important to them.

From an advice perspective, financial planning is a more intensive and deeper discussion as it involves looking at the entirety of an individual’s or family’s financial persona. Financial Planning is also more likely to be more expensive than a quick fix product sale due to the duration of the actual planning process and the need for specialist skills.

So if it’s more expensive, should financial planning appeal to the intended consumer of such services? My own professional experience would seem to indicate that it comes more into my clients’ vision when they get older and become more focused on future needs rather than the quick response to current problems. This is not to say that younger individuals would not benefit but for financial planning to work you need to have the maturity of life experience to appreciate its benefits.

Some financial planners feel that it is a service for only those with wealth or the realistic expectation of wealth. I disagree. Everyone can benefit because everybody has dreams that can be brought to reality with a little forethought and personal application. For those that can and do seek out financial planning advice, the benefits can be immense.

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