Pretty much everyone we deal with worries about time, money and the decisions they make. Proper financial planning is the key to resolving these issues. A number of clients we have been introduced to have, in the past, approached a financial planner for advice and been sold commission laden products. Fortunately, these days many financial planners provide good quality financial advice which doesn’t rely upon the sale of a financial product.
Many people don’t know what true financial planning is, or how this could help them. Rather than put together a few clever words to explain this, it’s better to consider the questions financial planning aims to answer. Here are a few examples:
- Will we be able to maintain our standard of living?
- When will I be able to retire or, more importantly, achieve financial freedom?
- Will we need to downsize our property or sell other assets to live the life we want?
- What happens if one or both of us require long-term care?
- What is the position if one of us dies?
- Can we help support our children and grandchildren?
- What happens if there is a fall in investment returns?
Good financial planning helps to resolve many of these issues as it can provide clients with the confidence that they have the financial flexibility to survive whatever life and the markets throw at them.
It’s also comforting to know they have a trusted financial expert who understands both the client and their family’s circumstances and goals, who will review their finances over time and help them make the tough decisions they will almost certainly face. Lifetime cash flows, properly structured portfolios, tax efficiency and contingency planning are all areas which a good quality financial planner will use to help build a proper financial plan.
We look to build a long-term relationship from when you arrive with a bag full of the financial products that you have bought (or been sold) over the years to such time when these have all been analysed, improved upon if necessary and the initial financial plan implemented. The annual review meeting will be more than a discussion about the last 12 months of market noise and will focus on whether you continue to be on the right track. Meeting your financial and lifestyle goals is what it’s all about and having the confidence to enjoy the opportunities that your wealth allows is what really matters.
The greatest wealth is your peace of mind and that’s what financial planning is really about.
Equity markets tend to be cyclical. Positive periods are followed by negative periods, which are then followed by positive periods. Because of this, it is common when markets are falling to ask whether it is possible to time investment decisions to sell at the peaks and buy back at the troughs.
One way to do this might be to analyse forward-looking information such as economic and corporate data and make predictions about the direction of the markets. But it is hard to make predictions, especially about the future.
Another approach might be to look back at data from previous cycles and identify patterns that could be repeated going forward. Researchers at Dimensional Fund Advisors did exactly this, running almost 800 tests on data from 15 world equity markets to identify signals that might point to a change of market cycle and simulating the trading activity that might improve investment returns.
Most of the 800 tests failed and resulted in worse performance than would have been achieved by just going with the flow of the market. But some of the tests worked and produced positive performance results.
You might think this is good news for investors—that they can replicate the trading patterns suggested by the positive tests. Unfortunately, the number of positive results was no greater than one might expect with such a large number of tests.
As the researchers explain, the odds of one-person coin flipping 10 heads in a row are small. But if you asked 100 people to try, you would expect around five of them to be successful. The same proportion of the 800 market tests were positive and the research was unable to determine if any of them were more than just a sequence of lucky coin tosses.
The research concluded that, on average, investors are better off sticking to their long-term investment goals and riding out short-term market volatility, rather than trying to time their trading to coincide with the peaks and troughs of the market. This is also the approach we advocate at volatile times such as these.
As a company we deal with many family businesses. One of the key benefits of a family business is the ability to ‘keep it in the family’ for future generations. This can however lead to a succession problem when the current generation is not letting go of the power. The next generation are preparing to take over the business for many years, whilst often the current generation has to come to terms with a number of issues of their own before they can let go of the reigns. Two of the most common issues are: –
- Are the seniors financially secure independent of their stake in the family business? If not, they are unlikely to take a back seat.
- What will they do after they spending so much time running the family business which includes them enjoying the reputation and status this enables?
These issues cannot be solved simply by spending more time and cost preparing the next generation to take over. As much effort needs to be invested into helping the seniors face up to the financial and emotional challenges they will encounter in their next stage of life. In many cases family members will often find that the answers they need in succession planning are dependent upon what the other generation plan to do, such as: –
- Seniors cannot feel they can plan for retirement until the next generation decide about whether they want a career in the family business. This sounds pretty obvious but many of the next generation feel that whilst they want to work in the business (it could be the easy option) they do not wish to run it.
- The next generation wants to take over and has planned to do so, but the seniors are not ready to commit to succession and retirement planning.
- The next generation are perhaps too young to make the choice to run the business but feel pressured to do so because that suits older parents.
Age and adult development add to the intergenerational dynamics of family businesses. Transitions tend to be smoother when the generations are what we would term as ‘In sync’ in that each generation is at the age and life stage to make the personal changes required for succession planning. The transition will be smoother when seniors aged between 60 and 70 are looking to structure retirement when the next generation are between the ages of 35 and 45 than it would be if the next generation was 19 to 25. The 19 to 25 year olds are exploring the options for the life they want so settling for a role on the family business may seem unattractive. When mid-life approaches, there is a stronger desire to make choices and have a more established life structure.
The transition of a family business is therefore far easier when the generations are in sync and when this is not the case, it may be better to take time over succession rather than put pressure on the generations. It is also very helpful if both generations discuss and understand the wishes of the other which are based around their life stage. These discussions must take place together and all must be frank and honest as to what they enjoy or dislike about their current stage of life and how they feel about the succession process.