Financial Advice or Financial Planning?

Written on the 26 April 2024 by Dean McKinnon

Financial Advice or Financial Planning?

The term “Financial Advice” and “Financial Planning” are quite often used to describe financial services, but they are quite different.

Financial Advice

Generally, the term Financial Advice is used to describe a financial service that provides a specific solution to a specific financial objective.

For example, someone might seek Financial Advice about investing. The investor may require a specific return on their investment to achieve their financial goal.

An example: the investor’s objective is to achieve a 10% annual compounding return over the next 10 years.  At the end of the 10-year period, the investor intends to use the original investment, plus the return, to purchase or pay for something.

To achieve the investor’s objective, the Adviser may recommend a share investment portfolio as the most likely investment.

Another example may be an investor wanting a 5% annual on their investment.  The investor intends to use the return to help meeting annual expenditure.

In this scenario the Adviser may recommend a Term Deposit as the most appropriate investment.

The recommended investments for these two scenarios are different because the investor’s objectives are different.

In the first example a share investment proposal is likely to have been recommended as this type of investment provides the investor with the opportunity of achieving both capital growth and income.

In the second example a Term Deposit may have been recommended as the investor’s need was to earn income from the capital invested.  The investor did not require the original capital invested to increase over time.

The key to Financial Advice is to tailor a specific financial product to the investor’s financial requirement.

Financial Planning

Broadly, Financial Planning is a term used to describe the process of applying the most suitable Financial Strategies to meet the client’s Financial Needs, Goals, and Objectives (‘Requirements’).

A Financial Planner’s role is to develop strategies that match the client’s Financial Circumstances and Resources (e.g., Income | Expenses | Assets | Liabilities) with their Requirements.

Financial Plans tend to be used to determine if the client has the Resources to meet their Requirements. The Plan then documents how the client implements the Strategies.

If a client doesn’t have the Resources to meet their Requirements, it’s the Planner’s job to adjust expectations accordingly.

An example of Financial Planning:

• Clients in their 50s want to retire at age 67
• Both clients work
• They have super, home (with a mortgage), and have no dependents

The Strategies required to meet the client’s Requirements could include:

1. Maximise Superannuation contributions leading up to retirement (concessionally taxed)
2. Use surplus income to pay off home mortgage loan (save interest)
3. Use Allocated Pension to meet retirement expenses (No Tax)

The Planner would complete a detailed Cash Flow Projection to determine if the Strategies recommended are likely to meet the client’s Resources and Requirements.

The Planner would likely also provide Financial Advice regarding Superannuation and Allocated Pension investment Products.  The Products would be tailored to the clients' Investment Risk tolerance and the likely returns required to meet the Projections.

Financial Planning is not just useful for those about to retire.

Consider a young couple, recently married, with their first child due.  A Plan for this scenario would need to include:

• How would the family meet expenditure if one or both parents are not working (Paid Parental Leave | Cash Savings)
• How would education costs for the child be met (5-6 years in the future)
• Are there more children expected (if so, when)

The above examples provide basic details of the Financial Planning process.  In practice, the exercise is more complex and time-consuming, but the insight and guidance provided is worth the effort.

Conclusion

Financial Advice and Financial Planning provide the client with a valuable Financial Service.  Which one is suitable will depend on the client’s Resources, Requirements, and affordability.

Clients with an understanding of their financial circumstances may only require Financial Advice.  This type of client will generally only require Advice regarding a Financial Product.

Clients that want to understand how they will achieve their short term, medium term, and long-term Requirements with the Resources they have will likely get the most value from Financial Planning advice.  There is not much use having a great return on an investment over the next ten years if you need the capital in five years to update your car.

Most Financial Planners incorporate Financial Advice into their Financial Plans to provide a comprehensive service.

If you’re not sure if you need Financial Advice or Financial Planning, contact us and arrange an appointment to discuss your Requirements.  Our first appointment is free of charge.