When it comes to finances, a lot of us are wandering through the dark. Over one-third of Australians don't feel confident when it comes to managing their money, and a similar proportion finds finances to be stressful and overwhelming, according to the Australian Securities and Investment Commission (ASIC).
The same report shows that nearly half of all Australians don't have a five-year financial plan in place. What would life be like then without financial planning, given this affects so many?
Take someone, for example, who wants to live a comfortable and balanced life, plan for the future, provide for their family and contribute to issues that are important to them. What if he/she doesn't work with a financial planner? What would change?
Without seeking expert financial advice, how would they know what's achievable? Would they be as well prepared if something unexpected came up in the future? Would they know what they could afford to do and plan for? Would their family be as well looked after? How would they feel about money?
Working with a financial planner equips you with a clearer vision of the future and helps you to make smarter and more confident choices – but it doesn't come for free.
What is a financial planner?
Financial planners are industry professionals who help individuals and companies plan for their financial futures. These planners can help you manage an investment portfolio, buy stock and other investments, advise on investments, set up a plan to reach a financial goal or plan for retirement.
The main reason people enlist financial planners helps to get an experienced opinion and guidance for their financial plans. While financial planners are not required to hold any special certifications, many of them do and are highly trained and experienced in the field.
The difference between a financial planner and financial advisor
While many people use the terms financial planner and financial advisor interchangeably, there are differences between the two. The term financial advisor is a broad, overarching term that encompasses anyone who helps to manage matters of money. This might be investments, real estate, major purchases, life insurance or even tax planning. Financial advisors are required to hold a special license to work with the public (Series 65).
Financial planners are people who help individuals and businesses plan for their financial future. Unlike financial advisors, financial planners are not required by law to hold any special certifications. That being said, many of them do hold licenses, special certifications and have attended special schooling to serve their clients better. Additionally, with certain areas of advising, there are some legal requirements they must uphold.
What is a financial planner, and who are they for?
A financial planner is a qualified professional who can help you to set your short, medium and long-term financial goals and give expert advice to help you achieve them. There's a common misconception that financial planners are only interested in wealthy clients. This isn't always the case. Being wealthy isn't a prerequisite, and people from a range of backgrounds and situations can potentially benefit from a financial planner's services. They have in-depth knowledge of all kinds of financial matters from investing and superannuation to insurance and debt.
Everyone has different financial needs depending on their life stage and individual circumstances. In many cases, generic advice you can find yourself isn't enough—this is where a financial planner comes in. They'll assess your situation, get an understanding of your unique financial needs, and create a tailored strategy to suit you and your goals.
What happens when you engage a financial advisor?
When you walk into a first meeting, come prepared with information and an idea of what your goals are. You'll also need to be open and honest with your advisor – if you give dishonest or incomplete information, you may receive advice that doesn't suit your situation (if you don't have all the information, fear not, just be upfront about this).
Your advisor should ask you about what financial goals you hope to achieve – for example, are you aiming to pay off your mortgage, save for retirement, ensure you and your family are protected in case of an accident or serious injury. They'll also need a comprehensive overview of your assets, liabilities (including student loans), income, expenses and insurances. If you're exploring any form of investing, they'll also need to discuss how much risk you are willing to take.
Should you hire a financial planner
You're free to hire a financial planner at any point in time. But there are some instances where it might be more important to enlist the help of a financial planning expert.
You're at, or close to, retirement age
Some of your biggest money questions may arise when you're close to retirement. Do I have enough money? What are my options? How can I save more? Financial planners are trained to help individuals plan for and navigate the unique challenges of retirement.
You got a significant raise
When you've got more money coming in all of a sudden, it may be time to put together a plan. While you can use that money to raise your short-term quality of life, you could look into using it to increase your wealth and future financial position. Financial planners can help you decide where to invest, what options you have and what might be the best way to increase your overall wealth.
You received an inheritance
One of the most important times to seek the help of a financial professional is when you receive an inheritance. You'll most likely have questions about where to invest, how to take care of your passed family member's final financial wishes and how the newfound money changes your life moving forward. Financial planners can answer all of these questions.
You're going through a divorce
While divorces can take a major toll on your emotional health, they can also take a major toll on your financial help because of shared finances. Who gets what? How do I protect myself? Where should I reallocate my assets? All of these questions and concerns can be put to rest with the helpful advice of a financial professional.
You've had a major life event happen
Any other major life event that happens might require the help of a financial planner. If you change jobs, downsize dramatically, find a new source of income, have a baby, sell a business or anything else, you should have a plan. A financial planner can walk you through all of your options and help you to make the most well-informed decision.
You're ready to take control of your financial situation
You don't have to have a major life event happen to get the desire to take control of your current and future financial situation. If you're ready to make a new plan, reach out to a financial planner. Additionally, if you have an existing plan that you want to stress-test, a good financial planner can help you identify and plug any leaks for optimal performance.
You don't need a financial planner if
You live paycheck to paycheck
While you still need a financial plan, you probably don't need the help of a financial planner. Instead, you should look into simple practices like budgeting, saving and cost-cutting to slowly get ahead. Once you've made up some ground with the basics, you can look into getting the help to take the next step.
You're deep in debt
Financial planners mainly focus on helping people grow wealth. Additionally, financial planners are not free, which is not ideal for someone in debt. What you need instead is a credit counsellor or financial professional who specialises in getting people out of debt. Once you're out of debt, you can start focusing on growing for the future.
You know what you're doing
Financial planners are designed for people that need help making financial decisions. If you're already an expert in the field, you might not want to pay for the help of a professional with the same knowledge base. The only exceptions to this might be if you're short on time, want a second set of eyes, or you want to stress-test your existing plan.
Why should I hire a financial planner?
Financial planners can help walk you through tough financial decisions step by step. A quality, a well-trained financial planner, can break down complex situations in ways you may be able to understand better. Additionally, financial planners can lay out all of your options and help you to make the best fiscally responsible decision moving forward.
Will a financial planner guarantee I turn a profit on my investments?
Financial planners may be able to help create an investment portfolio with little to no risk. Depending on your situation, though, they may recommend an investment strategy that does carry some level of risk. In these situations, financial planners won't be able to guarantee a profit, as they can't control the fluctuations of the market.
Are all financial planners the same?
No. Financial planners come in all different shapes and sizes, and it's critical you take the time to shop for the planner that best fits your needs. Some of the most significant ways financial planners differ include experience, certifications, licenses, time available, account minimums and costs and fees.
Many people wonder whether financial advisors are worth it -- what their average cost is if the fee is reasonable, whether they should hire investment advisors or financial planners, and so on. Well, if you're thinking "I need a financial advisor," you probably would do well to hire one.
Sure, there are bad ones here and there, either simply unskilled or just not looking out for your best interests. But a good financial advisor can do wonders for your financial life.
Why financial advisors are worthwhile
Some people don't need much financial advice. You, too, might not...
- If you have been saving for retirement diligently and investing effectively.
- If you have devised a sound retirement plan that will generate sufficient income in your golden years.
- If you've got just the right amount of insurance to protect your home, your car, your life, your income, and anything else that needs protecting.
- If you have your debt under control.
- If you have an estate plan that minimises taxes and headaches for your beneficiaries.
Few of us have all those financial ducks (and some others) in a row, though.
According to the 2017 Retirement Confidence Survey, about 24% of workers said they had less than $1,000 saved for retirement, and a whopping 55% had less than $50,000. Only 20% had socked away $250,000 or more.
Having $250,000 put away is certainly far better than having, say, just $50,000 saved. But even $250,000 won't go as far as you might think. Consider, for example, the well-known "4% rule," which suggests that you withdraw about 4% of your nest egg annually in retirement (adjusting for inflation over time). With a nest egg of even $250,000, that would give you just $10,000 for the year. If you're counting on Social Security, making up the difference in your retirement income needs, know that the average Social Security income is about $16,000 a year, too.
When should you get a financial advisor?
A good financial advisor can look at your big picture -- he or she can assess all your financial needs and challenges and can help you achieve your goals. A financial advisor can guide you through retirement planning, investing strategies, tax issues, dealing with employee stock options, and more. This is valuable throughout your life, but especially when you near major life events, such as paying for college, buying a house, getting married, having a baby, adopting a child, retiring, or inheriting assets.
When changing jobs, you need to consider how to deal with your retirement accounts. All of us should evaluate whether we have adequate disability insurance or need long-term care insurance. Financial advisors can help you determine whether you're better off leasing or buying your next car, whether you should refinance your mortgage, how to avoid estate taxes, how to maximise your ability to care for elderly parents, and so on.
Are they qualified and licensed?
Ask about their qualifications - do they have a university degree and a postgraduate qualification such as a Certified Financial Planner? If you are looking to minimise your tax, you can also consider seeking a financial planner who also has an accounting background. Check to see if they are licensed by looking on the Australian Securities and Investment Commission (ASIC) website. I know this sounds obvious, but you may be surprised by the number of disaster stories you hear that involve suspecting advisers who aren't even licensed to provide advice. Do your checks!
How much experience do they have?
It takes time to understand strategies, structures, tax and the financial markets, so the more experience your adviser has, the better they can advise you. Ask them about their history in the industry.
What areas do they have experience in?
Just because they have a long list of services, that doesn't mean they are experts in all of them. Ask them to detail their focus and preference for particular client situations.
How much will it cost you?
Financial advisers are required by law to detail any income they are likely to receive for their advice, either from your fees or in commission from third parties in return for referring particular products or investments. You may like to consider seeking an adviser who has an agreed fixed-fee model, where you pay for the number of agreed services that your adviser will provide for you, rather than paying a percentage on the amount of money you have to invest.
The best advisers are unlikely to be the cheapest and just like any other professional, expect to be billed for their professional expertise.
Are they independent?
Many advisers are affiliated to or directly employed by large corporations that have their own line of products. This may limit the range of products they have to offer you. Ask questions around what they are approved to recommend and understand the limitations of what they can't recommend.
Choosing an adviser is an important decision, so take your time and ensure you feel comfortable in their qualifications and experience as the decision will likely impact on your future retirement.
Why not increase the financial savviness of those around you – pay it forward and pass on these tips to your family, friends and kids.
Why is a financial planner worth it?
Financial planners understand how to achieve financial goals
Whether you're saving for a house deposit, managing debt, planning for retirement, already have an investment portfolio or are thinking about investing your money, a financial planner can devise a plan to meet your goals. They'll suggest effective strategies to reach them as efficiently as possible, and you can re-engage them to review your plan in the future if things change. Common matters for which people seek a financial planner's advice include superannuation, budgeting, tax management, asset management, estate planning and more.
Financial planners have in-depth knowledge of financial products
Financial planners are experts in financial products, tools and strategies, and they'll know which combination of these can support you in achieving your financial objectives. These can include particular types of insurance to suit your circumstances, how to best manage your savings and borrowings, budgeting and general money management, and tailored investment strategies.
Financial planners can save you a lot of time and energy
While it is possible to manage your finances on your own, engaging a professional can save you a lot of time, effort and energy, especially if overseeing them yourself leaves you feeling stressed or confused.
Rather than having to stay on top of economic and legislative changes that impact your financial situation, a financial planner can do the legwork on your behalf. If you're using a financial planner's services to guide your investment strategy, they may also be able to manage your portfolio.
In the long run, you may make your money back
While in most cases it does cost money to use a financial planner's services, according to a 2016 study by the US arm of Vanguard Investments, you may recover your upfront costs in the long run. This is because financial planning can lead to more efficient money management, including tax effectiveness, savings on interest, faster home-loan repayment, and other strategies that save and look to maximise your money.
The Vanguard Investments study found that financial planners could add a potential 3 per cent increase in net returns for their clients through a combination of sourcing lower-cost investment tools, managing asset allocation, helping clients devise and stick to a financial plan, and other tactics.
Hiring a financial planner can help you navigate the more challenging (and sometimes simpler) financial situations. If and when you do decide to enlist the help of a professional, make sure you take the time to select the right financial planner. Look for experience, the right certifications and a knowledge-base equipped to handle your situation.