Financial planning practice

This audiovisual presentation looks briefly at how a product research tool might be used to help select the most appropriate financial product for a client’s objectives.

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Once the overall plan has been created by the financial planner, one or more financial products will usually be required to put the plan into action. Given the plethora of products and options available, conducting thorough, effective research and due diligence on these products can be very time-consuming. This research however is a very important part of the financial planning process and planners should ensure that it is carried out as effectively as possible, comparing products on a like for like basis and matching the most appropriate product to the client’s needs and objectives.

Independent financial planners are required to research the whole of the market, whilst restricted advisers may have a smaller pool of products or funds to research, depending on the nature of their ‘restriction’ (which can vary widely). As well as researching and selecting products for new plans, client’s existing products will need to be periodically reviewed for ongoing suitability as part of their plan review.

More and more financial planners now delegate the product research and selection process to paraplanners, enabling the planner to spend more of their time with clients and creating the overall plans at a generic level, whilst larger organisations may have a dedicated research department, especially those operating product or fund ‘panels’.

The main areas of research are:

Tax wrappers/platforms : Once the planner has decided on the type of tax wrapper(s) to be used at a generic level, i.e. pension, ISA, investment bond, they then need to determine whose version of that wrapper will be the most appropriate for their client.

Many planners now use platforms for the majority of their clients and so the default choice of tax wrapper tends to be the one provided by their preferred platform provider(s). Research and due diligence on the many platforms available is another process in itself. However whilst platforms provide very distinct advantages for both planner and...

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...he inconvenience and the potential cost of advice to implement the switch.

Any service or administration issues with the provider should also be considered when determining the ongoing suitability of a product, particularly where the client is unhappy with their provider or mistakes may have been made by them.

The underlying funds and asset allocation should also be reviewed to ensure that the portfolio remains in line with the client’s objectives and risk profile. Where the portfolio has become misaligned with the appropriate asset allocation then this can be rectified by rebalancing the portfolio. The review will also include analysing performance with continual underperformers replaced where appropriate. Fund switches should also be considered to use a client’s CGT annual exempt amount to wash out accrued gains and prevent large capital gains building up for the future.

Documenting  research

Planners and paraplanners should clearly document their research in a manner that easily shows how they arrived at the selected product(s) or funds. Normally some justification for the recommended product or portfolio will be included in the report, with more in-depth research recorded on the client file.  Where the paraplanner has undertaken the research and the planner is relying on their analysis, the planner should be fully aware of how the product selection has been determined.

Recording the research clearly also helps when it comes to any file or compliance review or should queries or complaints be raised in the future.

The documentation could be in any number of formats, however the main thing is that a clear like for like comparison can be evidenced, together with the rationale on why the selected product was used over and above others that may have been suitable. This might include a long list and a shortlist, with an in depth comparison of charges, features etc between those on the shortlist and a final comment to explain why the eventual product was chosen.

There are certain life events or circumstances that will raise particular financial planning issues, the most common of which are as follows:

Marriage

Cash flow projections: Some couples may already have been living together for some time and marriage will produce little, if any, change to their income and expenditure. On the other hand, there can be significant changes that coincide with the marriage, such as the purchase of a new home. The current and lifetime cash flow projections may well need to be revised.

Joint or separate finances: Clients may wish to have joint bank accounts or maintain separate accounts. The ownership of some assets may also be brought into joint names. This may be less likely for older couples who have been married before.

Wills: Marriage will automatically invalidate any previous wills made, so new wills will need to be drawn up. Those clients who have never made a will should be advised to do so.

Financial Protection: The financial protection arrangements will need to be reviewed to make sure that they are aligned with current circumstances and any changes as a result of the marriage.

Savings goals: Marriage may trigger new savings objectives, such as planning for the cost of children and their education or buying a new home. Career plans may be revised, which may also affect objectives in these areas.

Inheritance Tax: The IHT position will need to be reviewed, with the clients now potentially benefitting from the transferable nil rate band and inter-spouse exemptions. Where a spouse is not UK domiciled, there are further planning issues to address, as discussed earlier in the course.

Divorce

Cash flow projections: the income and expenditure patterns of both parties will change and both the current and life time cash flow projections will need to be revised.

Wills:  Any wills will need to be revised to reflect the change in circumstances (as will any powers of attorney in place where the ex-spouse is named as attorney).

Division of assets: Jointly held investments and other assets will need to be valued and allocated to one or other of the parties involved. In some cases this may involve selling an asset, splitting the proceeds and reinvesting one of the shares (or both should the financial planner find themselves continuing to work for both parties)

Pensions: Pension entitlements will need to be valued and taken into account when considering how the overall assets are to be split. Advice will be required as to the most appropriate course of action for the pension arrangements in question, i.e. splitting, earmarking or offsetting.

Mortgage issues: One of the parties may remain in the marital home, in which case the mortgage will need to be rearranged. Alterna...

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...ny redundancy payment

                                Consider whether any freelance or casual work can be taken in the interim

After 2 months:      Spouse switches from part-time to full time work if possible

After 6 months:      Children withdrawn from private school

After 12 months:    Disposal of assets/investments

                                Downsize family home.

Serious Illness

Planning in this area will depend on the prognosis, i.e. is the condition short term/long term/terminal? This will of course affect whether the client is able to return to work and if they are, it will be important to try and get an idea of when they might be able to return and whether they will be able to work full time (for those already retired the financial impact will normally be much less severe). Often, however, the prognosis will be fairly uncertain which makes planning for the future an even more difficult task.

For employed clients, the planner will need to determine what level of sick pay may be available from the employer and how long this is paid for (and whether the client’s job will still be there for them when they recover). Where the client is going to be affected long term and unable to return to work, they may be able to access their pension benefits early.

Clients with protection policies in place may become entitled to benefits under their critical illness and/or income protection policies.

Once all of these factors have been taken into account, as accurately as they can be, then the cash flow projections will need to be revised. Where there is a drop in income, particularly for those clients not receiving adequate sick pay or benefits from a protection policy, cutbacks in expenditure are likely to be required (such as those discussed in the section on redundancy).

Requirement for long term care

Long term care planning is a specialist area and beyond the scope of this course. Generally speaking, however, planning will be based on an estimate of how long the client is likely to live, which is, of course, extremely difficult to predict. The main financial objectives for most clients going into care will be to try and make their capital last as long as possible and ideally leave behind some assets to their chosen beneficiaries. Clients requiring care should also be advised to put in place lasting/continuing powers of attorney as soon as possible.

The client’s financial plan should normally be presented in the form of a report. This serves to provide clients with a permanent record of the agreed strategy and the reasons behind them. The report may also be provided to family members or other professionals who are involved in the process. The initial report will set out the long-term plan, which will be reviewed and revised in future as appropriate.

Where the plan includes the sale of a financial product, the report should include the reasons why the product has been recommended. The main aim of the report however should be to explain the recommended strategy in a way that the client will understand and show how it will help them meet their agreed objectives.

The way in which reports are structured varies widely across financial planning firms and there is no definitive ‘right’ way to structure a report. Below is an example template layout:

Introduction

This section should make clear the aim of the report, for example to provide a recommended strategy to meet the client’s financial aims. Some planners may include a background to their own firm here or perhaps to the financial planning process in general. There are also likely to be some disclaimers in this section as well, for example a warning that the report is based on information supplied to the planner by the client.

Executive Summary

An executive summary near the beginning of the report can provide some focus to the main body that follows. The summary should list the steps of the recommended strategy, perhaps with a very brief rationale to go with it. For example:

“In summary my recommendations are as follows:

Invest £20,000 into an ISA for the current tax year - this will utilise your ISA allowance in full

Invest £80,000 into a general investment account (GIA) – this will be a tax efficient means of investing your remaining capital, given that you are not using your CGT annual exempt amount elsewhere

Invest the funds held in the ISA and the GIA in the Wizard Balanced portfolio – this portfolio matches your agreed risk profile and objectives

I will explain how these recommendations are designed to meet your objectives and explore the likelihood of achieving your goals in the main body of the report that follows.”

Current position

This section should include the following:

Personal and family situation inc health, dependants etc

Income and expenditure analysis

Assets and Liabilities /Net worth statement

Amount of investible capital that can be used towards recommendations

Current cash flow projection

Life time cash flow projection

Some planners will include the client’s IHT position here and details of existing wills, powers of attorney and any estate planning already in place. Others...

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...interrupt the main flow of the report could be included as an appendix.

Jargon: The report needs to be written in language that the client understands and industry jargon avoided. Some terms are unavoidable, for example ‘SIPP’ or ‘CGT’, and these should be clearly explained and the meaning of the acronym given at the outset.

Format: Rather than one long body of text, tables, diagrams, graphs etc should also be used (as and when appropriate) as these generally help people to understand recommendations better. Short paragraphs are also easier to read, as are shorter sentences, and the report should have a logical flow and be clearly divided into sections to make it easier to follow. Making the report as visually attractive as possible will also enhance its appeal to the client.  

Suitability: Where the financial plan involves the recommendation of specific financial products, the planner will need to satisfy the FCA’s requirement of demonstrating ‘suitability’. The report will therefore double up as a document both for the eyes of the client and potentially the FCA – two very different audiences.

This can be problematic and some planners may be tempted to include every conceivable risk warning and go to extreme lengths to try and demonstrate suitability, for example ruling out each and every retail investment product in the marketplace for each and every recommendation, in order to protect themselves from future scrutiny or complaints. This approach can result in very lengthy reports, which are hard to read for clients and likely to contain a lot of information they aren’t remotely interested in. One solution to this would be to maintain robust file notes or other information on the client file that can be referred to in future, rather than trying to include everything in a report.

The financial plan should be written with the assumption that the client will accept the recommendation (although this will not always be the case). Recommendations should be SMART – it is not helpful to provide the client with a range of options and things they could do (after all, they could probably manage to find a list of options on the internet!)

Revisions: Not every client is going to agree 100% with the recommendations made on seeing the financial plan and the recommendations and report may have to be revised. Some clients may still be unsure about what they want to do, even when they have gone a fair way through the process, and it is only when they are presented with recommendations and a financial plan that they get a clearer idea of what exactly they want.

Planners should be prepared to make revisions to their reports after presenting them to the client, which could normally be taken care of in the form of an addendum to the original report.

We have looked at the process of researching and selecting products and planning in specific circumstances. Final recommendations should be presented in a report to the client and ...

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...e planner can then provide all necessary documentation at the implementation stage.

The next section - Chapter 5 - will look at how the recommendations made will be implemented.

This revision test (opens in a new window) ...

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...test will be added to your CPD certificate.