Understanding what is possible makes it easier to invest and plan for retirement
What is possible?
2020 was a year that made us question what we see as normal, and also what the future holds for us. It made us question what our futures will be and how effective our planning and preparations for the future have been.
The financial services industry has for years been providing solutions to help prepare investors for their futures. Products and investment philosophies have evolved over time, leading to the advanced investment philosophies that are used to construct your investment funds today.
The financial advice industry has likewise been through changes and continues to evolve. Originally, the industry was focused on the sale of commission-based products but most recently the focus has been on goals based financial advice. This is a welcome improvement that puts the needs of clients first, and involves advisers and clients working together to design a strategy that aims to achieve client goals. Clients are able to commit to the plan as they are involved in the creation process.
The major challenge with a goals based approach is that it presumes that clients know what their goals are, and are able to effectively articulate those goals. Part of the challenge stems from the difficulty in working out how you would like to live in retirement, but also because it is hard to know what is possible. One of the difficulties is understanding how much an investment will grow over time. In one of our recent articles, we talk about ‘The importance of understanding maths and biases when investing’. In this article we used a story about a reward requested by the inventor of chess – a single grain of wheat on the first square of a chessboard that would be doubled for each subsequent square. The result was a ludicrously huge amount of wheat but it highlighted the difficulty we have in understanding compounding returns.
The role of financial advice should allow you to understand what could be possible, and provide flexibility to achieve it. The focus needs to be on the process of planning and adapting to what may become possible over time, rather than on setting a single plan in concrete.
It is hard to imagine what we have not experienced. When we are asked how we would like our lives to be in the future, we base it off our current experiences and naturally do not factor in likely future events.
Imagine what a 20 year old thinks they need in their life, and compare it to the same person at 40 and 60. Their goals would radically change as they progress through their life. And if you look at your own situation – being asked for goals can be very hard to answer. Are you being unrealistic or too conservative? If you ask for too much, will your adviser have to be the bearer of bad news?
What if instead you were able to investigate a range of possibilities available to you? What if there were multiple scenarios that could be chosen, and you then focused on the trade-offs and choices that were necessary for each. Remember there is no perfect solution, and gaining more of one thing (eg more retirement income) could come at the expense of another (eg increasing the age at which you retire).
The important aspect of this process is that you are in control, and focused on matters that you have control over. It makes an interesting change to looking at performance of companies (which you have no control over).
Handling an uncertain future
Start by doing what’s necessary; then do what’s possible; and suddenly you are doing the impossible.
- Francis of Assisi
As we have said many times, you can’t consistently predict investment markets. You can always take guesses (and often have strong preferences) about how you want markets to perform, but we are always constantly surprised at how events twist and turn. 2020 was a prime example of how we can all be surprised by such events.
We find that the same unpredictability occurs when people set long term goals. People’s views of their futures are shaped by their current views and circumstances. As their views and circumstances change over the years, their goals necessarily change as well. This is entirely normal – a 20 year old would have little chance of knowing their goals as a 65 year old as there are too many unknown life events that will occur.
If we do not expect investment markets to be predictable, you may question how this affects goals based financial planning. What is the point in spending time to set goals now if there is a high chance that will change over the next 10, 20, or 30 years?
The answer is that we don’t expect anyone’s goals, dreams and aspirations to be set in concrete. We expect changes as new events occur, and preferences and aspirations develop as new experiences are gained throughout our lives.
Financial planning is an ongoing process. It involves more than just setting a goal and rigidly sticking to it. One important aspect is understanding the possibilities that are available to you. Your financial plan should grow and adapt to your changing life and preferences. Part of the planning process should be to ask: “what is possible?”. This will help create a financial plan that is tailored for you, and ensure you get the maximum value from your financial advice.
Considering what is possible as part of the planning process can lead to a better understanding of the things that are meaningful and important to you. This process can open up possibilities and areas that were previously unknown. As you would expect, if you don’t know what is possible, you will not strive for those outcomes. Remember that you can adjust your goals as new opportunities and possibilities arise, and a focus on what is possible allows you to change your future to one that is both realistic and achievable.
Advice is valuable
Many receive advice, only the wise profit from it
- Harper Lee
This leads nicely into a discussion on the importance of financial advice and how financial advice is valuable. The Financial Services Council’s report titled “Money and You – breaking through the advice barrier” in December 2020 provides a number of illuminating examples.
This recent report finds a number of benefits from receiving financial advice. In terms of tangible benefits, the report finds advised clients receive better returns, have more funds invested and save more than unadvised investors. They also find that advised clients are better at managing their risks through the use of financial products.
This explains the report findings in relation to its question of how financially prepared respondents were for retirement. Almost two thirds (62%) of those with a financial adviser said they were either very or reasonably prepared, compared to barely one-third (32%) of respondents who did not receive advice.
In terms of intangible benefits, advised clients are more likely than unadvised clients to report:
- Greater peace of mind financially;
- Greater control over their financial situation;
- Greater confidence in making financial decisions;
- Achievement of their financial goals;
- Achievement of their personal goals;
- Being free from financial worries and stresses;
- Being able to live their desired lifestyle.
Ultimately, the advised clients’ report that they are better off as a result of the financial advice they receive. It is also interesting to note that advised clients of all ages report that they are better off from receiving financial advice, which confirms that advice is not restricted to a point in time, but is an ongoing process that improves both financial and non-financial outcomes for clients.
Disclosure Statements for Britannia's Financial Advisers are available on request and free of charge. Product Disclosure Statements for the Britannia Retirement Scheme and the Integral Master Trust are available from the schemes’ issuer, Britannia Financial Services Limited, phone 0800 500 811.
The information contained in this article is of a general nature only and does not take into account individual circumstances. It is not intended to provide comprehensive or specific financial advice. Before making an investment decision you should talk to your Britannia Financial Adviser.
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