Planners key to financial fitness

Financial success requires careful planning and expert advice on how to lower risk, improve investment returns and achieve long-term financial goals. While it’s possible to achieve this on your own, research indicates that clients who are advised by a financial planner tend to be more satisfied with their investment outcomes compared to those who embark on this journey alone.

According to research conducted by Vanguard, a financial adviser can potentially add about 3% of value to a client’s portfolio, with as much as half of this value the result of behavioural coaching.

A partnership with a reputable financial advisor encourages a long-term perspective, ensures investors are more accountable and encourages them to stick to a plan, says financial planner at The Financial Coach, Gregg Sneddon. He likens the role of a financial planner to that of a mentor or long-term coach.

“Financial planning is the process of identifying your personal financial goals, as well as your financial risks, and then addressing them in the most efficient way possible,” says Sneddon. “We all face five common risks: dying too soon; living too long, disability; funds for emergencies; and debt.”

Financial planning, he explains, identifies the extent to which these risks pose a threat and how each should be addressed, while the amount of financial risk will inform how much insurance is required.

Money is an emotional issue, agrees Quinton Quait, financial planner at Oracle Broker Services, and all too often people get confused by mixed media messages and opposing marketing advice. A long-term, trusted partnership with a professional financial planner who can be objective, unemotional, focused and with a firm grasp of the facts can help clients achieve their financial goals, particularly the creation of retirement wealth.

“A professional financial planner won’t only take the myriad products on offer into consideration, but also tax legislation and the opportunities prevalent during your first and last day of work,” says Quait.

The key to successful wealth management is to approach it from a long-term perspective, says Andrew Moller, director and CEO at Citadel, which is where a relationship with a trusted financial advisor comes into play. Wealth management requires a long-term relationship with a partner who can devise a plan, traverse the same path, and who understands your lifetime needs and goals. “Building wealth needs a steady hand on the tiller, especially during volatile times when emotional responses should be avoided,” says Moller. “This is when you need to be able to rely on an advisor to react appropriately to market conditions and help you stick to your financial plan.”

By remaining invested, and thus benefiting from compound growth, investors will ensure their investment objectives are optimally achieved over time.

All too often the DIY investor makes decisions based on emotion and a very short-term horizon, and risks losing out over the long term as a result of poor decisions, says Anthony Field-Buss, a financial advisor at 3byTwo Financial Planning.

From a life insurance perspective, partnering for the long term involves looking at a client’s individual needs at every life stage and adjusting cover accordingly, says Michael Goemans, CEO of Investec Life. This ensures the individual is appropriately covered and only pays for the cover they need.

“The goal is to create wealth by using money more effectively,” he says.

As such, insurance solutions should be flexible, tailored and adjustable over time, and should also take into account the individual’s overall financial position. He advises using transparent solutions that allow for flexibility over time rather than focusing on short-term gimmicks such as discounts and boosters which may not achieve long-term value.

“Although a financial planner can play a key role in long-term financial fitness, at the end of the day it’s you who will be the most impacted, so you need to make sure you are sufficiently empowered and understand the key aspects you are getting into,” says Goemans.

It’s human nature to respond emotionally when it comes to money and how it’s invested. A financial planner, says Moller, removes the emotion and brings a more level-headed approach to the situation.

“The effects of bad decisions on a portfolio can be particularly amplified in times of volatility,” he says. “The temptation to sell when the market has declined becomes greater, as does the desire to buy when the market is running. Both actions can lead to poor investment returns.”

Find appropriate opportunities

There is no one size fits all in terms of where to find the best or safest investment opportunities. In fact, the most ideal investments depend largely on an individual’s investment objectives, time horizon, tax situation and age.

The longer your time horizon, says Moller, the more you can skew your investments towards growth asset classes, irrespective of where the market is in the cycle at any given moment. “For those who have a longer time horizon, we would advise equities as this is the best asset class for protecting against inflation and creating wealth, despite the volatility, especially if you have time on your side. Quality companies can remain dynamic throughout the cycle and are able to increase margins and beat inflation over time.”

Another factor to consider, he says, is an individual’s specific tax situation which will impact on the most suitable products for them personally. “Someone who is only in a retirement product in South Africa and has no tax on their investments or is invested in a tax free investment account, will require different investments to somebody who is being taxed on their returns.”

The value of financial advisors is that they are providing quality “advice-led”, as opposed to “product-led”, investment solutions, based on the individual’s circumstances. Not all products are created equal, reminds Field-Buss. “Some have investment terms, some don’t. Some have penalties for withdrawing before the term. Others, including retirement annuities, limit one to how much exposure you can have invested in different asset classes.”

It’s therefore vital, he says, to understand what you are saving or investing for and regarding the latter, to understand what the ongoing costs are.

As a blanket investment strategy, Citadel typically advises that portfolios are divided into three components: a stable component which is invested in cash instruments; a prudent component invested in inflation-matching or even inflation-beating instruments such as foreign and local bonds; and a growth component, focused mostly on equity, listed property and, to an extent, hedge funds.

“As we approach the end of the economic cycle, we are gradually increasing the stable and prudent components, ensuring more stability in portfolios, while increasing the number of defensive assets and shock absorbers in the growth component,” reveals Moller. He adds that cash is unlikely to beat inflation over the longer-term, which is why Citadel generally prefers to carry only as much as clients may need for the 12 to 24 months.

SA bonds are currently offering attractive yields compared to inflation, he says, although the same can’t be said for global bonds. “In terms of equity, we still prefer global to local given current valuations and growth outlooks,” says Moller. “SA equity growth will depend on the restoration of business and consumer trust and confidence, which would see additional capital inflows that would support the local market environment.”

Life insurance a crucial part of holistic plan

All too often insurance is regarded as something of a grudge purchase. The reality, however is that life insurance is an important element of a holistic financial plan, insists Goemans.

Insurance should be considered on an individual basis, taking affordability and life stage into consideration. “While individual needs can still vary considerably – even when compared to other individuals at a similar life stage – and while some events can be planned for, others are unexpected. Comprehensive insurance should cater for all such eventualities, which is possible if it is sufficiently personalised,” says Goemans

Life cover, he explains, is primarily about protecting family and loved ones from the financial impact of your death. Income protection cover, on the other hand, replaces lost income as a result of illness or injury. It also enables you to invest for the future by allowing you to continue to pay for your children’s education and save for retirement.

Disability cover provides a lump sum payout in the event of a major permanent injury or illness while severe or critical illness pays out a lump sum and helps to cover costs that don’t fall under medical aid cover.

Negotiate your way through the hazards

Financial advisers will typically assist clients to avoid these common pitfalls when it comes to financial planning.

  • Investing without a long term plan. It’s vital to understand your long term goals and how you will achieve them. A financial planner can help to create this plan – and then ensure you stick to the plan.
  • Choosing the wrong investment product. There are a myriad of potential investment products each with their own particular restrictions and benefits. A reputable financial planner can assist you to make the most appropriate choices given your unique circumstances.
  • Not re-investing your retirement savings when you change jobs. It’s vital to preserve your retirement savings and to get the correct advice regarding how to invest it. The statistics around how much we all need to retire comfortably are scary so it’s important to save enough from early enough. At the same time, counters Sneddon, the fundamental issue of retirement is an outdated concept given that we were never meant to be unproductive for more than a year or two, let alone two or three decades. He advises reinterpreting our understanding of retirement and finding a productive occupation – and income generator – even after the age of 65, in order to minimise the pressure on retirement wealth.
  • Not factoring inflation or fees into your considerations. “Inflation absorbs the capital and interest over time so you will never create wealth by saving your money at a bank,” points out Quait. Similarly, points out Sneddon, high fees can also erode your opportunities to realise higher returns.
  • Not diversifying sufficiently. Don’t focus only on one market or one asset class. Sneddon advises making use of a combination of both active and passive investment, as well as local and offshore investments.
  • Knee-jerk reactions to market events or volatility is one of the biggest destroyers of wealth. A financial planner will help you to remove the emotion and stick to the long-term plan.
  • Staying in debt and not ensuring sufficient liquidity. Sneddon says he sees his role as a financial planner as actively encouraging and pursuing a debt free status for his clients. “Debt enslaves you. Get rid of it as a quickly as possible,” he advises. Similarly, he advises ensuring that there is sufficient liquidity available for emergencies either in a money market account or access bond. Quaint advises a three month salary emergency cash savings account or a Unit Trusts Portfolio which is more liquid than a fixed deposit account.
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