I have been thinking for a while how best to describe collaborative financial planning for retiring and retired clients. With the regulator’s rekindled interest in risk capacity this is rapidly becoming an important issue for many advisers and their service and product suppliers. I am very sure that I don’t have the final words. However, for what it’s worth, this is my current perspective on the collaborative process that itself is based on the primacy of the client’s informed consent to the risks in both their their plan and their investments.
There are invariably trade-off decisions that have to be made during planning. To simplify the argument, we know that many clients have needs and aspirations beyond both their assets and their risk tolerances. We can’t have client’s saying “My adviser didn’t tell me how quickly I would run out of money in retirement.” Client dissatisfaction is entirely predictable unless a transparent collaborative process to illustrate the possible financial and lifestyle outcomes is applied. The benefits of a clear and logical collaborative process include:
Consistency with regulation which demands evidence that the client’s informed consent has been granted.
Authentic conversations between adviser and client which differentiates and enriches their relationship compared to alternative more automated processes.
Clients more likely to take ownership of their plan than when they’re simply told what to do.
Advisers effectively share responsibility for the critical decisions in the planning process with their client.
The last is of growing importance as regulators around the world mistakenly focus on financial advisers as the primary perpetrators of mis-selliing.
What is a financial plan?
Simply put, a financial plan is the matching of assets to liabilities as they fall due. For most of us it’s just making sure that there are sufficient funds to meet our liabilities in our lifetime. For the wealthy amongst us it’s that plus planning to leave entitlements to others after we are gone and for those of us with a philanthropic disposition, it’s making moneys available to others while we live. In this definition goals and aspirations beyond subsistence living are flexible discretions. In my simplified view there are three parties to the plan with decreasing levels of predictable outcomes : the planner, the client and the markets whose views, skills and behaviours have to be regularly re-aligned. This is the essence of the ongoing process that client’s need to value and pay for.
What is the adviser responsible for?
The adviser brings her expertise and experience amongst other things to:
Help bring the client’s data together into a coherent platform for decision making.
Help the client articulate and prioritise their goals and aspirations.
Undertake a cash flow analysis and test multiple scenarios including explanations of sequence risk.
Discover and apply legitimate methods to reduce taxes.
Construct investment portfolios that maximise the likelihood of achieving the client’s goals.
Construct those portfolios with fees consistent with likelihood of that goal achievement.
Provide a review process that enables the client to fine tune their plan, alert them to any alterations in their behaviour required to achieve their goals and take into account regulatory and investment changes and opportunities.
Combined the adviser helps the client make informed trade-off decisions in relation to both the risks in their plan and the risks in their investments.
What is the client responsible for?
Clearly it’s the client’s plan as it has been designed to meet their needs and circumstances. Plans require both regular reviews and re-planning; “I want to retire with an income of X.” In this case variables such as the amount to be withdrawn, inflation, fees, taxation and investment earnings each require realignment on a regular basis. Reviews also give the client the opportunity to re-set goals and/or promise to amend behaviours .”Based on the information now before me it’s clear I will need to spend less or perhaps take a part time job.”
The client’s primary responsibility is to agree to their plan which means they must:
Articulate and prioritise their goals and aspirations
Agree and ‘manage’ their spending budgets
Accept the investment risk in their plan such that they understand the return expectations and potential volatility of their portfolio. Specifically that:
Sequence risk of several years poor returns has been explored and explained
Accept the overall returns are likely to be lower than they might have been encouraged to hope for and are more volatile than they might otherwise be prepared for
Understand that when markets are moving to the extremes that they appropriately rebalance; selling down part of their fully valued assets when markets have risen and buying undervalued assets when markets are correcting.
Clients need to be actively engaged in the planning process, their plan and investment portfolio recommended.
What are the markets responsible for?
There are just two obligations we must ask of the market and its regulators:
Deliver an equity risk premium to reward investors for taking additional risk beyond bonds and gilts
Be a trustworthy source of investment so that investors can select it with confidence above alternatives such as direct property and gold.
In several countries at least one or both has not been achieved since the 2008 market collapse.
Informed Consent is the heart of collaborative planning.
The planning process is collaborative and ongoing because the world is full of uncertainties. Advisers must bring their expertise and professional judgement to the fore. Clients must prioritise given the options presented and the behaviours asked of them because the markets will do what the markets will do. Investors should never be surprised by the market’s outcomes. It’s only when all three; advisers, clients and the markets are aligned that the client’s informed consent can do its magic. Newly retiring and retired clients are probably the most difficult group to manage. Collaborative decision making is the safest way the adviser can protect herself.