Get the right tools for lifestyle planning

At themost recent FPA National Convention, Ian Hutchinson gave a session titled, ‘Passionate planning means designing finances and lifestyle’.

Ian’s message was simple — if you want to provide a truly holistic service to your clients, you should help them define and achieve their lifestyle goals rather than focussing on short-term investment returns.

Ian’s presentation started me thinking about how the financial planning industry has evolved in its approach to planning, and where it may be heading from here.

In the beginning there was investment advice. And it was good. Or so the advisers thought at the time. New products sprang up in response to an increasingly complex financial landscape, and new rules were brought in by successive governments to encourage certain types of investment behaviour.

High rates of commission drove highly paid advisers to recommend highly reputable products to highly excited clients looking for high investment returns. That was the low point of financial planning.

Then came the shift towards financial planning, rather than investment advice, where all of the client’s current situation was taken into account, a written plan was provided, and recommendations may have included such things as salary packaging and other non-investment related matters. The industry had reached adolescence, and skin blemishes started to appear, and things got hairy where there was no hair before.

Typical was an increasing interest in secs (aka sector funds), alcohol (like listed wine producers) and, eventually, drugs (biotechnology). Certain authority figures started to flex their muscles in response to some wayward behaviour by misguided adolescents.

During this awkward period, risk profiling was used to determine a suitable asset allocation for the client. Suitable products were recommended possibly along with some suggestions for improving the bottom line through salary packaging, gearing, alternate tax structures or budgeting.

Finally, the fully mature beast has appeared. Older, wiser and slowly gaining respect, the mature financial planning industry is looking toward the next phase. I will abstain from using the term ‘holistic’ here and borrow instead from the aforementioned Ian Hutchinson and refer to lifestyle planning.

Lifestyle planning involves not only looking at the client’s current situation in its entirety, but also helping the client to define and focus on their lifetime goals. It also entails evolving from the strictly technical stage to a more inspirational method of helping clients.

Practical implementation of lifestyle planning requires sophisticated tools that can:

collect and interpret the client’s lifestyle goals,

quantify these over the full term of the client’s expected lifetime, then

allow for the development of a strategy that will, given the current set of circumstances and assumptions, allow the client to achieve these goals.

Traditional risk profiling can then be used to test the ability of the client to accept the portfolio volatility. Where the volatility is not acceptable to the client, a process is required to enable the reconciliation of differences between the client’s goals and what their risk tolerance will allow.

For example, in this scenario you are Houston Harbinger, respected CFP. Your client Bob has set some heady goals for retirement, including the 36-foot yacht, red Ferrari and a strict Moet and Beluga diet. Given that Bob has little surplus income, has not saved anything of note and intends to retire in five years, his money will need to work pretty hard to achieve his goals. Your analysis of his risk tolerance indicates that a term deposit with more than six months to maturity causes him constant insomnia. Houston, you have a problem.

The reconciliation process essentially involves a combination of producing a higher return on investments and improving cash flows. It also involves reducing the cost of the lifestyle goals and increasing the client’s tolerance to risk.

There needs to be some structure to this so, for example, a paraplanner can still produce a viable plan without constant reference to the client.

Benchmarking is another term open to interpretation within the financial planning industry. We are told that benchmarking should be done as part of the regular review process.

Some think that benchmarking should involve setting an expected return in the original plan then comparing this to the actual returns generated from the portfolio over the review period. Others think benchmarking was the vandalism they inflicted on high school property during woodworking classes.

Lifestyle planning seems to define benchmarking as comparing the client’s progress towards their lifestyle goals against the expected progress defined in the original plan. Perhaps there is only a subtle difference between the two, however, the manner by which each is presented to the client are worlds apart.

As previously mentioned, a range of sophisticated tools is required in order to facilitate lifestyle planning. I can almost guarantee that you do not have these tools at present.

You may have a system that goes part way to a proper solution. These do not provide a ‘whole of life’ solution, as they cannot always quantify lifestyle goals, nor can they test the viability of your proposed strategy. With ever increasing life expectancies, this functionality is critical to true lifestyle planning.

You need to tell your systems solution providers what you want from them both now and in the future, and ensure they listen and act, so that you and your business are not caught in the time warp of perpetual puberty.

Ian Caldwell-Smith is the product andaccount manager with InvestmentData Technologies.