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The Value of Financial Planning

The Value of Financial Planning


If you are considering going to a financial planner, it is worth having a concept about what they should do - how they should add value to your situation.


Overall the role of the financial planner is to provide you with a clear financial direction that incorporates your goals with realistic expectations and a personalised strategy.  There are six steps components that go together to make up that clear financial direction, and they are:


  • Contingency Planning
  • Financial Organisation
  • Financial Planning Strategy
  • Working with Your Financial Goals
  • Portfolio Construction
  • Saving You From the Big Mistakes!


Let us look at these one at a time.


Contingency Planning


Contingency planning involves looking at solutions should you ever be injured or ill and unable to work, or were you to die.  It makes sure that if tragedy strikes you have made provisions for a replacement income, providing financial for your family and distributing your assets as you wish by making a will.


The part of financial planning focuses on using life insurances and estate planning to prepare for worse case scenario - hoping of course that you never have to rely on this preparation.


Financial Organisation


Financial organisation is an important habit in being successful financially.  It may include such aspects as:


Putting in place a regular saving strategy

Tracking the returns from your investments

Receiving professional advice

Organising your investments

Understanding your financial situation

Keeping appropriate records

Measuring your financial position

Tracking your cash flow


Working with a financial planner should help improve your financial organisation, which will ultimately help improve your overall financial situation.


Financial Planning Strategy


Choosing the correct financial planning strategy for your circumstances is crucial in receiving the best long-term financial outcome.  Financial strategy considers such things as:

In which investment environment should assets be held (eg spouse's name, superannuation, a company)?

Should borrowed money be used to invest?

What retirement strategy is most effective for each person's circumstance?

Should extra contributions to superannuation be make?


Working with Your Financial Goals


Good financial planning should be focused on the client's goals.  Of course, the first aspect to consider is whether the client goals are realistic or not.  After realistic goals have been set, then the course towards them can be negotiated, and the goals reviewed along with all aspects of their financial situation at the time of reviews. 


These goals are the end game of financial planning.  After setting realistic goals, the financial planner then helps build the routine that will see these goals achieved over time.


Portfolio Construction


Portfolio construction should be a thorough process that starts with developing an effective long-term asset allocation.  The concept of long-term is important, as switching out of poorly performing asset classes into better performing asset classes regularly does not make sense because historical asset class returns are no indicator of the future return.  In fact, changing asset allocation on the basis of historical returns makes no sense and is likely to reduce returns as under performing asset classes recover and better performing asset classes go through a period of underperformance.


Then follows the identification of well-diversified, low-cost, tax effective investment options in each of the asset classes.  By focusing on getting well-diversified, low-cost tax effective investment solutions there should be no need to change these solutions regularly - they should provide the basis of a long term collection of portfolio holdings.


Saving You From the Big Mistakes!


When you invest money carefully over the long term you are providing your capital to be used by other people (banks, companies etc).  You therefore have a RIGHT to expect that you receive a reasonable return on that capital over the long term.  The financial planner is responsible for seeing that you receive this reasonable return, and that you avoid the BIG mistakes that cost most investors that reasonable return.  These mistakes include:


  • Swapping your asset allocation over time to try and chase the hot asset classes - and often missing out on parts of the return.
  • Trading stocks or managed funds often and incurring high transactions costs in your portfolio.
  • Not paying due attention to tax efficiency of your investments.
  • Paying too much in fees and therefore reducing your return.
  • Not having appropriate diversification in your portfolio.
  • Overconfidence - particularly thinking that you have found the ideal financial solution that provides above average returns for below average risk.

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