Imagine that you were interviewing contractors to build you the custom home of your dreams. How would you feel if one regaled you with stories about how wonderful his hammer and table saw were? The next, told tales of 2×4 lumber and how strong it was. And finally, the third contractor came in and asked you questions like: When you imagine your dream home, what does it look like? What are your absolute must-haves? How big is it? How many bedrooms, bathrooms? Can you show me pictures of homes, kitchens, etc. that you really like?
My guess is that contractor number three has the best chance of winning your business. The reason? He focused on your goals, needs, and what is important to you; while the others told you about the tools they would use to build your home.
This analogy seems bizarre, however, when it comes to financial planning this is exactly what happens. Advisors pontificate on how one investment is superior to the other. Or how fees are the only factor to consider when investing. Why you would be a fool to purchase one type of insurance over another.
This behaviour is no different than that in the example above. The financial services industry often behaves like the first two contractors – trying to sell you on the tools instead of educating you on the fact that products in the financial services industry are simply a means to an end – to help you achieve your goals.
Like the third contractor in the example above, the process needs to be based on your goals, not the bells and whistles of various products; advisors should seek first to understand your goals. Although it may be true that one type of investment has outperformed another type over the last twenty years, that doesn’t really answer the question of: “How can I retire at age 60 with $7,000/mth after-tax, in today’s dollars, indexed to inflation?”
For example, it is possible to achieve all of your goals while earning a three per cent annual rate of return; and it is also possible to achieve none of your goals while earning a 12 per cent annual rate of return. Knowing this, perhaps it is time to give more focus and energy to financial planning versus products.
If you don’t know where you’re going, it really doesn’t matter if you get on a plane, train, or automobile.
One of the biggest benefits in working to successfully execute a financial plan and tracking its progress regularly is that it will help prevent rash decision making. For example, if you have simply purchased some investments without a plan or a goal attached to them, then all that you have to focus on is the rate of return and the volatility. This results in way too much attention to the ups and downs of the market in the short term. By contrast, if you have a plan and your plan is still on track despite a small downturn in the market, you are more prone to stay with it and not attempt to become a market timing expert.
A good advisor should have a very clear understanding of your goals -create a roadmap showing you how to get there – and regularly review those goals with you to ensure that you are on track. Like any homebuilder, most have access to the same or similar tools. The difference is that a good advisor knows that the are tools, a means to and end, not an end in themselves.
Jed Levene is Managing Director at Rockwater Wealth Management. He is a Certified Financial Planner®, holds an MBA(financial services) from Dalhousie University, and a certificate in Behavioural Finance from Duke University. His articles on financial planning appear regularly on Orillia Today, Simcoe.com, CEGE Connection is pleased to advise that Jed has graciously agreed to be a repeat contributor on CEGE Connection.