Financial Planning: Your Ultimate Guide for 2023 – Welcome to the world of financial planning! This guide is crafted with the intent to demystify the complexities surrounding finance, investing, and money. We understand that navigating this realm can be daunting, given the abundance of confusing jargon and unfortunate past experiences with misinformed advice and unreliable sources. Our mission is to equip you with essential knowledge —to bring you back to the basics and foster a clear understanding of financial planning. In the following piece, we’ll explore what financial planning is, how it can impact your life (or not), the intricacies of the financial planning process, the benefits of working with a financial planner, and the distinction between a financial advisor and a financial planner. Additionally, we’ll delve into the various commissions and fees associated with working with a financial advisor and financial planner. Empowerment through knowledge is our primary goal. As you read through this guide, you’ll gain the confidence to make well-informed decisions concerning your finances, investments, and the things that truly matter to you. It’s time to take control of your financial future and embark on a journey towards a brighter, more secure tomorrow. Let’s get started! And if you prefer watching the summary of the video we made – go ahead!
Table of Contents
Introduction to Financial Planning
This financial planning guide serves as an introduction to financial planning that uses a holistic lens to your money and finances which is built around helping you achieve what is important to you. It’s about understanding you, your values, your challenges and what you want to achieve – and then constructing a blueprint or strategy tailored to helping you solve your biggest challenges and achieve your goals and aims (some of which may not actually be related to money). Money is just the enabler to living a certain life and doing the things you value and are important to you. Financial planning ties those threads together.
What It Isn’t
The framework that still underpins the financial advice industry today is that it remains transactional. In other words, unless a financial product is sold, the advisor doesn’t get paid. In other words, the advice is ‘free’ – and when you purchase a product (risk, retirement, investment), the advisor gets paid a commission or ‘fee’ if it’s an investment (more on fees later). So, it is in the advisor’s interests to find reasons for you to purchase a financial product. But what if you don’t need one? What if you are better served by doing something else – like paying off debt or investing in an asset on which the advisor doesn’t make money (like property)? Or doing nothing at all?
That means ‘advice’ in the true sense of the word – which you hope is going to be impartial, unbiased and in your best interests – is probably not the best way to describe it. Financial ‘sales’ is probably a better term to use.
Let’s be clear. There is nothing wrong with selling (or purchasing) financial products. The role that financial advisors play in selling products to those who need them is important. But understand who you’re dealing with and what it is you’re hoping to achieve. And which is why we’re such big advocates of genuine, impartial and independent advisors.
What Financial Planning Is
Financial planning on the other hand (which is a term people throw around a lot even when what they do is only geared towards selling products) – is in the planning process. The advice is what matters. Products are secondary. A ‘proper’ financial planner is paid for the advice they provide – and services rendered – which is typically via a customised and comprehensive financial plan that is prepared, written and delivered. And that plan is based on your needs, lifestyle, aspirations, challenges, fears and a whole lot more. Whether you go on to purchase a financial product is purely incidental.
Imagine going to see a doctor knowing the doctor only gets paid when they write you a prescription (by the pharmaceutical company whose drugs they are recommending). That might be fine if you know you’re sick and need that antibiotic or schedule 2 prescription. But often you’re not sure, and after examining you, all the doctor recommends is rest for a few days to get you back to full health. You still pay the doctor for their time to examine you and their recommendation, knowing it was done in your best interests.
The Financial Planning Process
A comprehensive and well-structured financial plan takes time to develop. Because it requires a detailed understanding of your life – both where you are today and where you want to be in future – to construct properly.
Whether you’re single, in a relationship, have children, the legal structure of your marriage/relationship; are all examples of things that can have an impact on the advice that you receive.
Money is often a very sensitive subject for many couples and even though a lot of people in relationships like to manage their finances separately, it’s important to still be able to discuss elements that are critical to your planning, particularly when there are minors or children involved.
The point is, financial planning is a process (not an event), that often takes numerous meetings and discussions between you and your planner before they are able to provide you with your personal financial planning blueprint. Below we demonstrate some of the steps in the process:
“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” Robert Kiyosaki
1.Understanding and Goal Setting
A good financial planner will always spend a lot of time getting to know you, your situation, what’s important to you, your values, and what you want to achieve – in order to build a plan customised to your needs. Because over time your circumstances will change and evolve, this process is ongoing and never ends. This really is a foundational and critical piece of the process and shouldn’t be rushed. And this step can be different for everyone. Some people are crystal clear about what they want and where they’re going. For others, it’s a bit more vague and takes reflection, discussion and thought to gain clarity. This is true whether you have a lot of money or are just starting out. Having money sometimes raises more questions than answers. It really is about meeting you where you’re at and building from there.
2.Cashflow and Balance Sheet Analysis
Like the foundation of any successful business is the cashflow statement, the same applies to individuals and households. Money in. Money out. More money coming in than going out equates to free cashflow. This is true if you make a lot of money or are struggling to get by. Just because you drive a Porche doesn’t mean you’re in fantastic financial health because you could be saddled with debt and be one missed payment away from bankruptcy. Understanding all your sources of income and expenses allows a planner to help you improve and optimize your cashflow. Is there wastage? What can be optimised? Are the other things to consider? Because the more free cashflow you generate, the more you can invest in yourself, your family, your future – while at the same time enjoy life and make the most of today.
Does spending money on unnecessary stuff (often fuelled by debt) make you any happier? It feels good in the moment but that quickly wears off when the stress and anxiety living on the edge (financially) or beyond leaves you feeling terrible. Living within your means feels good. Knowing you have very little, or no debt is liberating. You can relax. Enjoy life.
Free cashflow also means you can then use that to improve the health of your balance sheet and grow your net worth. You can pay down debt (like your mortgage) faster and invest in assets that will allow you to achieve financial security and independence. Spending time getting this step right is never wasted. Some people are just naturally disciplined, track everything on spreadsheets and are good at managing their finances. For others, they have no idea where all their money is going and need help putting some structure in place. Achieving financial freedom isn’t a function of how much money you make, but a function of how much money you can save and invest.
3.Modelling and Scenario Planning
Once an understanding of your background, goals and financial health have been developed (it can seem daunting, but it isn’t actually), the real work begins. It starts by running projections and scenarios by taking into account where you are today against what you’ve said you want to achieve in future. How much money do you need to retire or to achieve financial freedom? What will happen if you want to take a sabbatical for a year? How do you work towards leaving your job so you can start the business you’ve always wanted to? How do you live the lifestyle you’ve always dreamed of in your retirement years? How do you leave a legacy for your children and heirs? How do you get out of debt quicker?
All these things can me modelled and calculated to give you a very clear framework of how to achieve all the things you’ve decided matter to you. And remember what matters to you today might not matter in future – so this is an ongoing process that is performed on a regular basis to make sure the planning is relevant and up to date to what you need and want. Life happens amidst all that too – marriage, kids, new job, retrenchment, divorce, sabbatical – which will impact and change your plans. Modelling and scenario planning should be happening on a frequent basis. It’s the rudder that steers your ship through the turbulence, storms, and clear skies you’ll experience on your journey through life.
4. Developing Your Customised Financial Planning Blueprint
After all the modelling and scenario planning has been completed, the next step is for your financial planner to provide you with a written, clear, objective plan to set you on course. You might have a list of 10 things important to you and that you want to achieve, but like all things in life, you’ll need to prioritise and decide where you’re going to dedicate your energy and resources to begin with. Honest conversations might need to take place with your financial planner around what is most important right now for you to address. Having a strategy to get out of debt and create an emergency fund might be more important right now that putting together an investment portfolio. It might be that you need to fix your estate planning before you focus all your efforts on retirement planning. Your financial plan then serves as your blueprint and guide for all the areas identified you need to work on or address to achieve your goals, as well as actionable steps to achieve them.
5. Implementing and putting your financial plan to work
At this point, all the discussions and modelling and scenario planning might show that you’re in an extremely healthy and comfortable financial position – and that there isn’t really a lot that you need to do. The reality is, however, that for the most part, there will be steps you need to take to put all the financial planning to work, which the previous step would have crystalised. Some refer to this step as ‘implementation.’ Implementation could mean you need to consider purchasing financial products (s) like life insurance for estate planning purposes, top-up your retirement fund, diversify your investment portfolio – and a number of other steps like update your will, add beneficiaries to your life policies, set up a trust, structure your affairs more tax efficiently etc.
A good financial planner, will by this point also have done a cost-benefit analysis of your existing products and holdings to make sure that you need them (it’s amazing how many people have financial products they don’t need); look at the fees and charges you’re paying so you’re not overpaying, and aim to understand things like your employer retirement fund and the benefits it provides.
The ‘implementation’ stage is also where most advisors make their money because the financial product (s) they sell you is where they generate commissions and fees. A financial product is simply a commodity that is there to fulfil a specific need. The big institutions all like to highlight why they’re different/better and as such why you should purchase their products (retirement, investment, insurance) – but for the most part they’re all very similar. If impartial advice is what you want (rather than actively seeking to purchase a financial product) – the implementation stage will simply be a consequence of all the planning delivered.
6. Ongoing Navigation and Optimisation
We don’t live in a vacuum. Life happens. Good and bad. That’s in our personal lives and the world at large. So once your plan is set in motion, the journey only begins. Like a pilot must continuously course correct and adjust his navigation system to steer his plane safely to his destination – the same applies to financial planning. Working with your financial planner on an ongoing basis to steer the ship is how you successfully reach your destination. If you don’t stay on top of things, you might find yourself heading in the opposite direction of where you intended to go. But there literally are a hundred things that your financial planner will continue to work on you with. And if they’re not, you might need to reconsider your options. A good financial planner is someone you should have on speed dial and who you trust implicitly with some of the most important and intimate details of your life. Outside of a medical or legal emergency, they’re the person you typically call when you need help and want to get something done.
Financial Planning Services and Elements of a Comprehensive Plan
Cashflow Management:
Without being able to manage your finances and cashflow, it becomes impossible to win the money game and get ahead financially. This applies equally to high earners as well as ‘ordinary folk.’ (we see people earning millions struggle to get by.) Creating an emergency fund, getting out of debt and improving spending habits can all be part of the process here. There is also something very liberating knowing you have no debt, have more money coming in than going out and a sizeable emergency fund. It reduces stress, you can sleep better and enjoy life. Who doesn’t want that?
Protecting against risk:
any unforeseen events that can derail you or potentially wipe you (or your loved ones) out financially in a worst-case scenario falls into this category. Planning for death, disability and critical illness are usually the cornerstones of risk planning, but often cover provided by employer pension funds will take care of a lot of this (which is why it’s important to understand what you have). The purpose of this cover is to ensure that you and/or your loved ones can maintain their/your standard of living should any of those events happen. The cover that pays out will then usually be used to pay off debt and purchase an investment to provide an ongoing income stream.
That is why it’s important to know what you’re covered for and if there are any gaps. Short-term insurance and medical aid would also be regarded as part of your overall risk or liability cover – but often those are specialist areas dealt with specialists rather than financial planners.
Retirement Planning:
A large part of investing for financial freedom or financial independence is via approved retirement funds like pension funds, retirement annuities and provident funds. Reason being is that the government incentivises you to do so via tax breaks etc. so often at retirement, outside of your house, your retirement fund will be your next biggest asset. Should this be the only way you invest for financial independence? We don’t think so, because these vehicles have rules and restrictions on how they have to invest which can impact the returns they generate. You’re also locked in until at least the age of 55 – but mixing strategies via approved retirement funds and other forms of investment (e.g., investing offshore) give you more flexibility, options and make sure you’re better diversified.
Post-Retirement Planning:
Once you retire and move from the accumulation to deaccumulation phase of live, managing assets to generate income (rather than growth) tends to become the dominant focus. A lot of that might sit in an asset like a living annuity which provides you with the bulk of your income in retirement, but you might have other assets you need to manage to ensure you will have enough money to last you through your retirement years. How you think about risk and therefore your investment strategy might be different because you don’t have the capacity or ability necessarily to replace income or assets should anything go wrong.
Investment Planning and Portfolio Management:
Growing your wealth and net worth is a cornerstone of any planning process. What assets should you invest in? Equities, bonds, real estate, commodities, alternatives, crypto (which of course might not be for everyone). What should your optimal mix of assets or asset allocation be? How much money should you invest domestically vs. offshore? Should you be using structures and wrappers to house your wealth for tax efficiency etc?
In some ways it has never been easier to invest money. Go online, open a trading account and you can literally buy shares, ETFs and other instruments at the push of a button all over the world. But with that freedom, there is also complexity. How do you know what the best option is to invest in? What are the risks? What kind of return should you be aiming to achieve? How do you balance and diversify your portfolio optimally?
Estate and Legacy planning:
Often neglected and overlooked, estate planning is a cornerstone of any well-structured financial plan. It all begins with having a valid and up to date will drafted. It’s frightening how many people don’t have that. And once you start investing globally, this starts to become even more complex because you must factor in situs tax implications, forced heirship rules etc.
But a well-structured estate plan ensures that your wishes are followed around whom you want to inherit from your estate, taxes like estate duty can be reduced if your affairs are well structured, and savings can be made on the costs associated with winding up an estate like executor’s fees (which are also not insignificant at 3.5% + VAT of your dutiable estate).
So, estate planning is important. But something we tend to avoid because no one wants to talk about and plan for death. And this isn’t something you wait to do until you’re 50 or 60. Because it isn’t just about you, it’s about those you leave behind who have to deal with the burden if you haven’t planned properly. Estates can take years to wind up if proper planning was never done.
Legacy planning is something that those fortunate enough with sizeable estates might begin to consider because how wealth is transferred might be a little more complex. It might include charitable giving, inter-generational wealth planning using trust structures etc., thinking about what happens to family assets like businesses and often involves dealing with the whole family to make this as seamless as possible. Because inevitably, when there is a lot of money, there is going to be disagreement and friction amongst family members and those who stand to inherit.
Tax Planning and Optimisation:
No financial or investment decision is made in a vacuum. And while tax should never be the overriding factor (clever tax planning will never make up for a poor investment strategy), being smart and using all the opportunities available to reduce taxes should be explored. That includes reducing income tax where possible by making use of tax deductions, reducing CGT liabilities by using specific investment wrappers that enable that, using trust and company structures where levels of wealth warrant it, and as referenced in the estate planning section above, being smart about how to potentially reduce estate duty liabilities on death.
What we see happen a lot as well is that wealthier clients, tend to work with various specialists in silos. There is a lack of co-ordination amongst the financial or wealth manager, tax and accounting specialist, lawyer or estate specialist. Ideally, everyone should be working together to towards an integrated and unified strategy.
Life Happens and Special Situations:
Life is not a smooth ride and the best planning in the world can get railroaded or side-tracked by stuff that happens (good and bad). So, financial planning isn’t an isolated or single event but an ever-evolving process that adapts as your circumstances and life changes. Marriage, kids, divorce, starting a business, retrenchment, death or illness, promotion, new career, sabbatical, inheritance, selling a business – are all significant life events that can have a major impact and mean plans, strategies etc. need to be reviewed and updated.
That doesn’t even cater for all the black swan type events that could occur and the less severe but significant trials and tribulations that impact global markets and economies on an ongoing basis, which means having someone to help you navigate turbulent times is invaluable.
The Difference between a Financial Planner and Financial Advisor
The terms financial advisor and financial planner are often used interchangeably and there may be similarities in their roles, but there are some key differences worth pointing out. Wealth Manager, Private Banker, Relationship Manager are also commonly used depending on the institution you’re working with and level of wealth you have, but there is a lot of overlap irrespective of job title. A qualified financial planner is able to use a professional designation and has gone through an extensive qualification and certification process which includes writing board exams (like other professions do) via approved institutions (in South Africa the main one being the Financial Planning Institute). The FPI is globally recognised and adheres to standard set by the Financial Planning Standards Board (an international organisation). That allows someone to use the CERTIFIED FINANCIAL PLANNER® designation (which very few people relative to the total advisor population have).
A financial advisor on the other hand has a much lower threshold to achieve certification (it is improving) but requires fairly basic qualifications and passing a few competency exams that are not difficult, which makes it quite easy to become a financial advisor and before long be able to give advice to people on their life savings. That’s not to say there aren’t good financial advisors out there, but the importance of understanding a person’s history, background, qualifications and experience is particularly important if they don’t have a CFP® designation.
But it’s not only what professional designations (or job titles) people in the industry use – it really is the culture and process the firm they work for represents that really matters. Do they work for an institution (often the larger ones) where profit is the primary motive (because shareholders expect a healthy ROI) – and selling rather than service (or knowledge) is rewarded – so when you lift the veil from the glossy brochures and nice offices, you realise you’re just a number with a profit margin attached?
Whether someone is a financial advisor or CERTIFIED FINANCIAL PLANNER® – if the way they (or their firm) operate is geared simply to selling you a financial product so that they can get paid (via commissions and ‘fees’ on investments), it really doesn’t matter. Achieving impartial and unbiased advice that isn’t conflicted is going to be difficult.
What are Financial Planning Fees?
What fees can you expect to pay when working with a financial planner or advisor? There are a few basic ways planners and advisors make money in this industry. Understanding the differences will help you make more informed decisions around how you want to work with someone the next time you need advice. It can be a combination of all three, but for the most part options one and two dominate.
Types of Advice Fees:
Option 1: Commission generated by selling risk products (life cover, disability, severe illness etc.) The bigger the premium, the bigger the commission. For many it’s very lucrative because commissions can be sizeable. The risk to the advisor is that you stop paying the premiums within the first two years, in which case all the commission paid is clawed back (which of course hits the advisor’s pocket). What to watch out for – advisors aiming to replace existing policies with new ones to generate commissions (called churn).
Option 2: ‘Fees’ generated by selling investment products (including retirement products). This can be a combination of an initial ‘fee’ of up to 3% + VAT and an ongoing advice ‘fee’ of up to 1% p.a. + VAT. We think using the term ‘fees’ here is still a bit of a misnomer because they’re actually commissions. A fee has a correlation to the quantum, scope and quality of advice and service provided, which clearly isn’t the case here. It’s a very lucrative and attractive proposition if you have a sizeable investment book of clients because the fee acts like an annuity income stream. But tagging on a 0.50% p.a. or 1% p.a. (or whatever you’re able to negotiate with an advisor) ‘fee’ to an investment is not in any way correlated to the amount or quality of work done. What advice and ongoing services exactly does that fee pay for? If you have R10 million invested and are being charged 0.50% p.a. – what does that R50,000 p.a. you’re paying in ongoing advice fees actually cover?
Option 3: Paying fees that correlate with the amount of work and actual service provided. Fees paid on this basis might be calculated hourly, could be offered on a project basis (for example to complete a financial plan), or a flat-fee amount to provide ongoing services, which could be payable quarterly or monthly for example. There are no set fee scales and they can differ wildly across the industry, but for a qualified CERTIFIED FINANCIAL PLANNER® with solid experience, expect to pay upwards of R1,000 per hour.
What is the most transparent and fair fee option?
What is the best option? In our opinion the most fair, transparent and unbiased option is the ‘actual fee’ model (option 3). The assets under management model (no 2) does not correlate to the amount of work or quality of advice provided and inevitably means that if you have a larger investable asset base, you pay proportionately more (without that necessarily correlating to any additional service).
Whether you have R5 million or R10 million to invest for example – often the advice and ongoing service delivered will be similar – yet if you have R10 million, you may be paying double the amount in advice fees (and if it’s not double because a sliding fee scale is used) – it will still be significantly more. And by reverse engineering what you are paying roughly as an hourly rate (let’s say R10 million at 0.50% p.a. which is R50K a year) – you can quickly determine whether it seems fair and reasonable. How many meetings or reviews are you having annually? What other value adds does your financial advisor provide you consistently? Do you have a clear service menu that defines what you will get and can expect from being a client to the firm looking after you?
Should you work with a Financial Planner?
If you’re serious about your money and wealth – working with a specialist or professional can add a lot of value. Rodger Federer is a great tennis player. But he still uses a coach to help him. But as more information is easily and instantly available thanks to technology and the internet – an increasing number of people are looking to DIY.
That is a good thing (mostly). But understand where you’re getting your information and the credibility of your source. It’s easy for someone to post a video on YouTube or Tiktok and position themselves as an expert (without having any real credentials), so you should always be careful. And just becomes a well-known or ‘famous’ figure says something in the media, doesn’t mean they’re necessarily right, or that it aligns with what you need or your strategy.
And the financial industry is probably the one where it’s most common for two experts or professionals to have totally opposing opinions on things like the direction of the market, the economic outlook, whether stock a/b is a good or bad investment, whether you should invest in crypto … the list goes on. We call that ‘noise’ – and listening or trying to make sense of all of it, is impossible. Financial planning is about creating a strategy suited to YOU. Not what some person on TV says you should be doing, or thinks is going to happen.
So, the biggest benefit of working with a financial planner is how they can create and customise a strategy that serves you and your needs. And that’s all that matters! Often the unseen but biggest value you will derive from working with a professional is around your behaviours – where they can help you overcome your biases and blind spots (which we all have), especially when it relates to money.
But the decision whether you should work with a financial planner is personal and different for everyone – but having someone you can trust and turn to in good times and bad, really is priceless (and worth paying for!)
Conclusion
The purpose of this article was to inform, educate and guide you on the benefits of financial planning and really serve as comprehensive guide to all the different elements of financial planning. Understanding of the industry, how it operates, what to look out for – will empower you to make better decisions about your financial life so that you can achieve everything you’ve always wanted to. We want everyone to see money as tool to enable them to live their best lives.
Carl-Peter Lehmann
Carl-Peter is a Director and Partner at Henceforward. He has worked in the industry for more than 20 years in different places across the world. He studied at Stellenbosch University, is a CERTIFIED FINANCIAL PLANNER®, and has a certification in Discretionary Investment Management. He has spent a large part of his career helping clients with global balance sheets and offshore investing.
