The importance of planning your finances
This week (23rd-29th November) is Financial Planning Week 2014, an event organised by the Institute of Financial Planning (IFP) to raise awareness of how important financial planning is to our lives.
According to the IFP, financial planning "is not just for people who have never thought about their finances – it’s for everyone, whatever your situation." The IFP adds: "Putting some simple financial plans in place and making some smart decisions to help achieve your goals and dreams in life is the first step towards really taking control of your life and gaining valuable peace of mind."
As part of this week's promotion, the IFP has organised free financial planning surgeries across the UK. And on the IFP website you can have your questions answered with its Ask a Planner facility, and make use of free tips and tools that you can download from the site.
But when it comes to seeking professional help with your finances, what exactly is the difference between financial planning and financial advice?
What is financial advice?
To find out how financial planning differs from financial advice, we asked Danny Cox, Head of Financial Planning at financial firm Hargreaves Lansdown. Danny, a Chartered Financial Planner with over 23 years of experience in personal finance, says: "Financial advice has a very specific legal definition. It covers a process where a qualified and authorised expert reviews your current financial circumstances, goals, needs and attitude to investment risk, before making specific recommendations as to what course of action you should take. This action normally involves buying a financial product, such as an ISA, pension, mortgage or life insurance.
"Financial advice tends to be a one-off event, and is tactical to solve or help solve a current problem. It usually considers only one aspect of your finances at a time. Examples of this could be:
- Which ISA should I invest in?
- Should I buy an annuity at retirement?
- How much life insurance do I need?
- Which is the best mortgage for me?
"If financial advice were a jigsaw, it would be perhaps just completing one side."
What financial advice costs
Fees for financial advice are usually charged based on the amount you invest. Typically, these fees range between 1% and 3% of your investment, which means losing £100 to £300 for every £10,000 you invest.
Complex advice on Inheritance Tax planning or advice on pension drawdown might incur a fee of 2% of the sums involved. Likewise, a final-salary transfer analysis might cost between £795 and £2,500, plus VAT.
In addition, your financial adviser may receive an ongoing annual percentage fee from product providers from previous sales, typically 0.5% a year, which is known as trail commission. However, advisers now don't receive commission when you buy new investment products.
What is financial planning?
Danny Cox explains financial planning as follows: "Financial planning is more strategic and longer term – an ongoing relationship. A financial planner goes through a similar, but far more comprehensive, process to one-off financial advice. Your planner considers all the different aspects of your financial plans (mortgage, savings, pensions, investments, tax planning, etc.), how they interact with one another, and how best the whole 'jigsaw' should be put together, finding the corners, putting together the sides and a setting out a plan to complete all the parts in the middle.
"Financial planning usually involves the initial advice and planning, plus regular meetings, normally annually. At these meetings, your planner reviews your objectives, checks your progress against your plan, and makes recommendations to adjust matters to keep you in track. Financial planners often map out your finances over future years. This helps you to understand the recommendations made and your plan of action. Financial planning may or may not involve buying or investing in a financial product."
For example, three financial planning questions you might need expert help with are:
- When can I afford to retire?
- How much risk do I need to take to meet my objectives?
- How can I ensure I have financial security throughout my retirement?
What financial planning costs
Financial planning is usually paid for by fixed fees or, occasionally, an hourly rate. In addition, there is usually an implementation charge when you buy a product.
For example, a one-off consultation could cost between £495 and £995, plus VAT. Annual management costs would be 0.5% to 1% of a portfolio's value, plus investment management costs, taking the total to between 1.5% and 2.5% (depending on whether these investments are actively or passively managed). Regular annual meetings would be included within these costs.
However, according to Danny Cox of Hargreaves Lansdown, setting up a typical plan for an individual with broader goals would typically cost around £1,200 to £2,500, depending upon the complexity. At an hourly rate, this works out at about £100 to £250 an hour for consultations and follow-up admin work. What's more, financial planning involves regular meetings with your expert (usually at least once a year), to ensure that your progress towards your long-term goals is still on track.
Things to remember
Whichever route you take – seeking financial advice or consulting a financial planner – your adviser must clearly explain how much his/her services will cost and, together, you will agree how you will pay for this time, whether by an hourly rate, fixed fee or some other route.
As with any other financial service, it's worth shopping around, not only on price but also for someone you feel comfortable dealing with.
The Unbiased website has a directory of financial advisers, so you can find one local to you, while VouchedFor has both a search facility and unbiased reviews from genuine clients of the financial advisers listed.