What Does a Financial Planner Do? We Set the Record Straight

Did you know that most people don’t really understand the role of a financial planner? There are a range of misconceptions out there, so I’m here to set the record straight.

Many people say, “I need to see a financial planner”, or “I need financial advice”, without knowing what’s involved and what a financial planner actually does.

In fact, if we’re going to be honest, many old-school financial planners who began their careers as insurance salesmen or wanna-be investment advisers don’t even know what a financial planner should do! I wish I was joking.

What Does a Financial Advisor Do?

In a nutshell, a financial planner helps you to clearly identify your goals & objectives and then prepares a financial plan that has a high probability of achieving them.

The financial planning process consists of a number of steps where the adviser takes time to understand you, before ultimately providing you with suitable recommendations.

What is the Financial Planning Process?

The financial planning process should consist of three main steps.

Step 1 – Discovery

A good financial planner will begin by spending considerable time getting to know who you are and what’s important to you. Understanding who you are and what you would like to achieve provides the basis for everything a financial adviser does and every recommendation they make.

Step 2 – Initial Projections

With a good understanding of who you are and what you would like to achieve, the next logical step is to understand whether you are on-track or off-track, based on what you are currently doing. This provides context around the reality of your situation and whether your goals are too-lofty, overly-conservative, or somewhere in-between.

The initial projection can then be used to more precisely define your goals now that you have more clarity around where you currently stand.

Step 3 – Advice

Only now should formal advice be provided, as the financial planner will have a thorough understanding of who you are, where you are, and where you want to be. This way, the financial planner can be confident that all recommendations provided are appropriate to your specific needs.

Recommendations within the advice document should be accompanied by updated projections showing your ability to achieve your goals based on implementation of the financial planner’s advice.

The financial planner’s recommendations will undoubtedly include numerous strategies that can minimise tax, maximise returns, manage risk and improve your cash flow.

Ultimately, you will have a clear roadmap with step-by-step recommendations on what you should be doing, giving you a high-probability of achieving your objectives.

Learn more about our advice process here.

What a Financial Adviser Shouldn’t Do

There are a number of red flags that should see you running for the hills when dealing with a financial planner.

Here is a list of some things you should be wary of.

Financial Advice Fees

Understanding the costs of financial advice is an important part of deciding whether or not to engage the services of a financial planner and whether it’s worth paying for financial advice.

Cheap Fees

The old adage of ‘you get what you pay for’ couldn’t be more true in financial planning. I’m not saying you need to pay high fees – not at all. However, I am saying that you need to be extremely cautious of low fees. If a financial planner is charging fees of less than, say, $1,500, it is usually an indication that they:

  • will be receiving commissions from elsewhere to supplement the fee you pay;
  • have a conflict-of-interest with the advice they are providing; and/or
  • expect to charge you implementation fees and ongoing fees to turn-a-profit.

With overheads and compliance costs, a financial planner is extremely unlikely to be able to be profitable by charging less than $1,500 for personal advice.

Ongoing fees

Most financial planners charge ongoing fees to all of their clients. In my humble opinion, ongoing fees are only really necessary for a select number of clients, such as those with significant financial complexity, time-poor professionals or busy business owners with high turn-over.

For anyone else, ongoing fees are usually helping the financial adviser’s business more than your financial plan.

Percentage-based fees

If your financial planner charges advice fees based on a percentage of how much you invest, it should be a clear indication that this outfit ain’t right for you.

Firstly, just because you have $1M and someone else has $500k, why should you be paying twice the fees for the same service? This is the outcome if the adviser charges fees of, say, 1% p.a. – which is an extremely common fee charged by financial planners. The person with the higher balance is essentially supplementing the advice fees of the clients with lower balances.

I’ve got no problem with a fund manager charging a percentage-based fee, because their sole job is to earn high returns. And, higher returns for you, means higher fees for them – it’s a win-win. But, as I said, a financial planner is not a fund manager – their role is much more holistic than choosing investments, so why should their revenue be linked to investment performance?

Secondly, if you have, say, $1M invested under the guidance of a financial planner charging a 1% on your investment value; what do you think their advice will be if you tell them you want to withdraw $500,000 to purchase a property, or $100,000 to go on a trip around the world? You are threatening to halve the fees you are paying them, thus creating a conflict-of-interest in how they will deal with that situation. This is why it is my belief that all fees should be flat-fees, rather than percentage-based.

Learn more: Financial Advice Costs

Financial Investment Advice

Many people overestimate the importance of specific investment advice in the overall financial planning process. Investment recommendations and managing investment risk is an important component of the financial planning process, but if you’re looking for someone to advise you on the next Amazon, which stock will outperform during the next quarter, or what specific property to purchase – don’t go to a financial planner. The skill-set of a financial planner is not stock-selection or day-trading. But still, some financial planners have no other feather in their cap, so they pretend to be investment gurus.

Stay away from ‘Investment Gurus’

If a financial planner tries to sell you on his/her BS-ability to hand-pick the best investments for your portfolio…..RUN NOW! If a financial adviser insinuates that the majority of the value you will receive from them is the investments they choose, I can assure you they are deluded.

A financial planner’s role is not to hand-pick what they think are the best investments. Sure, investment recommendations are one component of the overall advice process, but the value a financial planner provides to you should be in the form of a well-constructed strategic plan working towards your short, medium and long-term objectives; using their understanding of rules, strategies and investment risk to get you there sooner and/or with more.

Delivery of Financial Advice

The formal recommendations provided to you by a financial adviser comes in the form of a Statement of Advice. However, this Statement of Advice should be preceded by deep and lengthy discussions about who you are and what’s important to you. Make sure your adviser is spending the time to get to know you.

Be careful of quick turnarounds

There are a number of steps involved in the financial planning process and cutting any corners is likely to result in sub-par advice.

If your financial planner tells you that your advice will be complete within 1-2 weeks of the first meeting with them, I would consider this to be highly discomforting. Remember, this person is providing you with financial recommendations based on hundreds-of-thousands of dollars, if not millions, to ensure you reach your goals. How on Earth can a financial planner understand you, your situation and your objectives, and then produce a well-thought-out advice document within two weeks? Your relationship has only just left first-base!

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Is Seeing a Financial Planner Worth it?

Financial advice from the right financial planner is certainly worth it. The benefits of advice will outweigh the costs and you will have comfort in knowing that you are doing everything you should be in the lead-up to retirement.

Our advice team is truly independent and specialises in providing affordable retirement planning advice to people aged 50 – 70. We charge a one-off fixed fee for advice, do not accept any commissions and never charge you any ongoing fees.

We pride ourselves on spending time understanding your unique goals before providing you with personal advice specific to your needs.

Learn more about our advice process here.

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Thanks for stopping by - Chris