by Richard Johnston
Chartered Financial Planner
A question often asked is ‘What is the difference, if any, between Financial Advice and Financial Planning?’.
Often the terms are used interchangeably and, of course, that is fine for everyday language, but in practice there is a significant difference between the two.
In this context, Financial Advice relates to a specific recommendation. An example of this could be ‘make a £20,000 gross pension contribution to a new Standard Life personal pension to reduce your income tax liability for this year’. Such recommendations may not need to consider your full financial situation, and may be transactional/one-off in nature.
If Financial Advice relates to the tactics of the matter, then Financial Planning relates to the strategy, because the latter is intended to consider your whole financial position (not one isolated part) and determine the best approach to achieving your objectives.
So, for example, while the advice to make a £20,000 pension contribution may well be appropriate, it does not help you understand your position in relation to your objective such as ‘I wish to retire in five years’ time’. To do this, we must consider all of your assets, income streams and liabilities/expenses, determine suitable tactics (Financial Advice) for each element, model them to determine your projected position, and assess the ‘what if?’ scenarios and trade-offs involved.
There is also a third aspect to consider, being ‘Coaching’. This is more important for some than others, but it is crucial that you understand the proposed tactics and strategy, and believe in them, for you to truly have the confidence to enjoy your retirement.
And this can be particularly important where you are relying on investments throughout your retirement, such as a stock market portfolio. If you do not have a reasonable understanding of how the stock market works, how your portfolio is designed, the risks involved and the decision-making process used, you are unlikely to be comfortable with it. There is, of course, nothing wrong with taking a cautious approach to investing – but that should be a conscious and educated decision, and not one based purely upon a lack of understanding as a result of poor communication from your adviser/investment manager.
It should be important to understand these distinctions when approaching a firm or an advisor to assist with your affairs, and to check that they will, in fact, be providing the service that you need. This, I consider, is the only way to be sure, because even firms describing their service as ‘Financial Planning’ may only be providing Financial Advice. If you would benefit from the wider service described above, you may feel short-changed because it may be no cheaper than a full Advice/Planning/Coaching service.