The Idealist July 1, 2004: ‘Lifestyle’ planning not true value of financial advice

At the end of the day, this job is primarily about managing client money. While initially it rightly involves a so-called holistic analysis of people’s overall financial position, the underpinning motivation for an Australian consumer, in engaging a financial planning firm, is to seek professional investment advice and portfolio management services.

Note, however, the change in ‘spin’ that has permeated the message from some large financial institutions over recent years — the message is now that financial planners don’t have the necessary skills to manage client portfolios and that a planner’s role is only to help clients achieve their ‘lifestyle goals and objectives’. In Australia, the catalyst for this change in message lies partly in those oft-chanted terms: compliance, scale and funds under management (FUM). However, having endured more doses of east-bound jet lag than I care to remember, I know it is a message with origins in the United States.

While it may be easy for Australian financial institutions, particularly those with North American parent companies or strong affiliations with US firms, to regurgitate a message which easily finds resonance with US consumers and planners, I suspect that most Australian consumers are less convinced that a financial planner’s job is just to help them achieve their ‘lifestyle goals and objectives’.

With an apparent propensity for US consumers to sign up with ‘coaches’ in everything from fitness, beauty makeovers, health and mental health ‘therapists’, anyone who has been to the USA can attest that while we speak the same language, without doubt Australians and Americans are at opposite ends of the cynicism spectrum.

Why Americans appear to so readily sign up for these things is not the question. Rather, from an Australian financial planning perspective, we need to understand that in order for an Australian consumer to pay us for our services, we have to do a whole lot more than keep quizzing them about what they want to do with their life each time we meet with them. And while social and cultural theorists may have counter views, I suspect that a typical Australian consumer wants and needs space and really wants their professional adviser to keep a professional distance.

Fundamentally, Australian consumers want to engage a financial planner who has the necessary integrity and skills to help them manage and/or accrue investment capital. Undoubtedly, while well-managed and accruing investment portfolios will provide consumers with greater financial security and therefore a greater opportunity to pursue and achieve their lifestyle objectives, it is the money, or lack thereof, which initiates and maintains the relationship between adviser and client.

A sound long-term professional relationship between a client and a financial planner is a delicate balance of trust, communication, forbearance and investment performance. The latter issue is, in the real world of the client’s eyes, that which holds it together over time. It’s where the financial planner has to really add value to the client’s life. A client’s trust in you, communication with you and forbearance when markets are unkind, are ultimately sutured together by a belief that you are adding value to managing their money.

As a sector of Australian BDMs representing non-discretionary master funds are schooled in ‘selling’ the message of why financial planners should hand over portfolio management to the ‘experts’, financial planners are unwittingly relinquishing control of the major plank of the client relationship — portfolio management. If they’re not actually managing the money, what is the client paying the planner to do?

If a financial planner can only give generic vanilla flavoured explanations as to portfolio returns and has little, if any, input into actual investment selection, where does the planner add value for money? Is asking a client once or twice a year how they’re going with managing their budget and savings, really worth 3 per cent per annum or so in total fees? If a planner helps a client to establish or amend a superannuation salary sacrifice arrangement once a year, is that really worth total costs of 3 per cent per annum or so?

What value will a 10-year retired Australian client place on being asked about her lifestyle goals and objectives every six or 12 months? How many times a year can a financial planner look a client in the eye and ask whether their will needs updating or about their insurance position?

As large financial planning groups seek to find economies of scale and lessen compliance risks, some are content to require their representatives to use non-discretionary master funds to more quickly and, allegedly, more efficiently build FUM.

On the other hand, many of those who have resisted the push to ‘outsource’ portfolio management and therefore remain in the discretionary world of portfolio management, suffer through client dissatisfaction with the high management expense ratios (MER) of index-hugging managed funds and, often, high discretionary platform fees.

While newer financial planners have much to learn about planning in general, one skill within the multi-faceted set which a financial planner must possess has to be portfolio management. It’s simply not good enough that consumers in need of sound investment advice have a ‘lifestyle’ planner foisted upon them.

Over the last decade, Australian academia has embraced financial planning education to a level never before seen. In the very early period of this growth, much of the curriculum has been written by experienced practitioners with the goal of building a profession. In some respects, it represented the basic knowledge set. Yet while much of this work has been extraordinarily valuable — and all who read this publication have in some way benefited from that early work — the next stage in financial planning education must be to take portfolio management to a higher level, building on the foundation technical skills. Financial planning in Australia cannot afford to be derailed to a ‘lifestyle’ mode which has a focus adrift of portfolio management.

Australian financial planners can be grateful that financial planning, as a distinct professional pursuit, had its emergence in the United States in the mid-1970s. But we need to be careful about adopting all things Stateside when it comes to financial planning in this country. While lifestyle coaching and its stablemates may achieve unprecedented popularity in the US, Australian consumers suffering from force-fed lifestyle indigestion, compounded by an inability to find a value add in portfolio fees, will eventually cry, albeit tongue in cheek and with due deference to Hollywood: “Show me the money!”

Ray Griffin is a Tamworth-based planner and former chairman of the Financial Planning Standards Board International CFP Council.