There are valid reasons for NOT using a Financial Planner. Equally, there are times when it makes absolute sense to use one. This article provides you with a short guide so that you can tell the difference. It also provides you with a few ideas when selecting a financial planner. This should ensure you have the best financial outcome.
The Benefits of Using A Financial Planner
There is only one reason why you would employ a financial adviser: You believe you will be better off if you follow their advice.
Through private consultation, financial planners help you determine the focus of your life. Common areas of focus are self-development, family, work and social. All these aspects of life are influenced by 2 finite resources: time and money. A financial planner will help you allocate these resources so that the best balance is achieved based on your overall wishes.
For those seeking to invest money, a financial adviser will help you make sure your financial house is in order before you invest your money. For example, a married man with 4 young children, minimal assets and no life assurance should protect his family’s future before investing.
Everyone can take their own advice, but we all have internal biases that cause us to make the wrong decisions at crucial times. One of those is to sell when markets have crashed. Another is the psychological resistance to sell an investment when it has made a loss and better options exist elsewhere. Academic research has shown, a financial adviser acts as a brake on those impulses and over time this improves your returns.
How To Choose A Financial Planner?
Financial advisers are known by many names: Financial Consultant, Financial Planner, Wealth Manager, Wealth Advisor, Private Client Adviser, Insurance Consultant and many more. However, when choosing a financial adviser, what their card says is not as important as the service they provide, the company they work for and their credentials.
As in many areas, financial services have undergone a revolution in recent years. The sector has become very complex with some services requiring specialist qualifications to provide advice. This means you will need to know whether the person you are thinking of appointing as your adviser will deal with all your financial matters or just one aspect. Some of the larger firms operate a system of having a single point of contact or relationship manager and the specialists are engaged when required.
Due to this specialization, financial advisers should be able to demonstrate their credentials with qualifications, client testimonials and experience.
Sadly, in the UAE there is no minimum level of qualification or experience required to call yourself a financial adviser, so tread carefully. Just because you like a person does not mean they know what they are doing.
Whilst the person you are dealing with is very important, the company they work for is crucial. The company will be the license holder that authorizes the person to provide advice in the country. It will also be responsible for the advice given by the person. Financial services is a very long-term business, most investments last for decades. Therefore, it is likely you will have more than one person looking after you at a single company during the period of your investment. So, it is important the company can demonstrate its bonafide. You are looking for appropriate licenses, service agreements, methods of payment and professional indemnity insurance (in case anything goes wrong).
You should check your adviser works for a company which is an independently verified fiduciary. A fiduciary is a company which must put your interests before any commercial or other interests of itself. Many think this is a given, but this is not the case and so a company that has been independently verified as a fiduciary should be chosen over one that lacks this distinction.
You should ask how the service is paid for and how much this will be. It is not only important to know what service you are buying but also how much it is costing. Many people have problems equating percentages and actual monetary amounts. Therefore, asking your adviser to provide both is helpful. Sadly, there is no regulatory requirement for advisers to provide this information, but the better advisers will be able to provide you with this information without difficulty.
What you should never do is make a payment to the financial adviser or their company for money to be invested – payments should be made directly to the investment company.
When You Do NOT Need A Financial Planner?
There are times when you will not need a financial planner. For example, when the charges out weight any benefit you may derive from using one. Often the fees which need to be charged by a financial planner for relatively small investments to make the provision of advice commercially viable make the cost of advice very high as a percentage of the amount invested. For example, say the cost of advice is AED 5,000 and you have AED 15,000 to invest. That is 30% of your capital gone immediately. Whereas if you were investing AED 150,000 the AED 5,000 is a more reasonable 3%.
Another example is when you have the time and inclination to do the research and manage your finances personally. With the rise in self-help books and online platforms, this has become a popular route. However, without the proper foundations in place problems can arise when markets are volatile as they are now in 2020. Making sure assets are correctly allocated according to your risk preferences and economic circumstances is not rocket science but rebalancing (selling ‘good’ performing assets and buying ‘poorly’ performing assets to control risk) is hard to do psychologically on a consistent basis.
Summary
This article details some of the benefits of using a financial planner. It also highlights some of the things you should consider when engaging with a financial planner.