We at Network Locum (now Lantum) have asked financial adviser to health and sporting professionals, Chris Broome to provide his thoughts on GP finances. His conclusion - whatever phase you are at in life, you should be investing in your future!
1. First you need to establish which ‘Life Phase’ you’re in
When developing and implementing a financial plan, it is important to consider where you are in life. The three main life phases that can be used as a guide in the financial planning process include asset accumulation, capital appreciation and capital distribution.
Asset Accumulation
The asset accumulation phase can be described as the time in your life when you are most likely focused on purchasing a variety of different assets. Usually, people in their 20’s through their 40’s are buying houses, investing in their education and increasing their earnings through promotions and other career moves.
Capital Appreciation
In many cases the rapid growth in the accumulation of assets begins to significantly slow as we enter the capital appreciation stage. The transition to this new phase can be expected to occur as early as the mid 30‘s through the late 40‘s. At this point in our lives, our careers have matured and supporting a growing family becomes the main focus of our efforts.
Capital Distribution
After the accumulation and appreciation phase, we then move into the capital distribution phase of our lives, otherwise known as retirement, around our early to mid-60’s. A few years leading up to this point it’s wise to begin to reallocate higher risk assets, such as stocks, into low risk assets such as bonds. This will help ensure you do not run out of money during retirement.
What is your financial plan?
Once you understand your Life Phase you then need to put in place a financial plan.
Should I pay off my debt or invest my spare money?
One of the first steps with financial planning is to deal with any debt you currently have. The answer to whether to pay it off or to invest your spare money depends on two points:
1. The rate of after-tax interest you are paying on your debt
2. The after-tax rate of return you expect to earn on your investments
You must first understand that there are two different kinds of debt. On one hand there is high-interest credit card debt. This type of debt is the most dangerous and generally should be dealt with vigour. The second type of debt is the lower interest variety; such as your mortgage, student loans, etc.
With that in mind, the answer to the debt reduction vs. investing problem can be solved with this one statement: If you can earn a higher after-tax return on your investments than the after-tax interest rate expense on your debt, you should invest. Otherwise, you should pay off your balance.
Start by identifying your short, medium and long-term goals
The next step in financial planning is to identify your goals. Your short-term goals (5 years or less) might include a wedding, a honeymoon, furniture, or a new car.
Next, you need to think about medium-term goals, such as owning your own home and financing your children through university.
Finally, list your long-term goals, such as retirement and travel, or owning that boat you’ve always wanted!
Engage with a financial planner to help you estimate how much money you’ll need to meet each of your goals, and then you’ll be able to determine how much you need to save each month to reach that goal within your timeframe.
Start budgeting for your future
When budgeting it is important to set aside money to go towards your short-term, medium-term, and long-term goals. If your financial planner offers a lifetime financial planning service, like at Broome Financial, they can help you put a structure in place to assist with this. This structure will evolve over time as your life, and goals, change.
Start the process of investing to meet your goals
If money is tight you can start saving a small amount each month. Then as your salary increases you can gradually increase the amount you save. Getting into a routine of doing this holds the key for your future success.
If you’ve got enough spare cash it’s a good idea to build an emergency fund to cover emergencies and big purchases – start to build that rainy day fund you always planned to have. These savings can be used for a family holiday, or to give you a financial cushion if you lose your job or have an unforeseen big expenditure. It’ll also help you clear any outstanding debt.
The use of a tax-efficient saving’s accounts with instant access can prove a useful vehicle, for example a cash ISA. You can then save a small amount each month more tax efficiently, whilst also giving you easier access to your money.
With your short, medium and long term goals in mind, a financial planner can assist you in determining a suitable investment strategy to meet these often different needs. For example, a short-term investment strategy might focus on accumulating assets in a lower-risk environment, whereas a longer-term plan would usually be focussed on investing your money into a diversified portfolio of assets to benefit from long-term growth in the value of those assets.
How do you reduce your exposure to risk?
A way of reducing this risk is having a spread of investments in different types of a particular asset. An example could be rather than buying shares in one company, you might buy shares in ten different companies to diversify your portfolio and help spread the risk around.
Who do you ask for advice?
There are hundreds of financial planners and financial advisers promoting themselves to the health profession. How do you know who to use and if they’re qualified to give you the advice you need?
Financial planners versus financial advisers
When completing your fact find, financial advisers will generally ask questions like “How much income will you need at retirement?” and “How much life cover do you need?” Typically, the answers lead to wide gaps into which financial products can be sold to you. This approach tends to leave you with three things – further uncertainty over your future, no cohesive financial strategy and a filing cabinet full of unnecessary paperwork!
The difference with financial planners is that completing your fact find, they will use the data gleaned to create a picture of your financial future, normally with a lifetime cash flow forecast and based around your current lifestyle cost and expected future desired lifestyle cost. Rather than asking you questions about what you think you need, the financial planner will tell you what you need because they will give you context.
The key to financial planning is a detailed analysis of the current lifestyle costs, and thought about how they might change in the future.
Independent advice versus Restricted advice
Do you know the different between advice that is ‘Independent’ and ‘Restricted’? From 1st January 2013 financial advisers will need to operate as either Independent or Restricted and clearly explain this when they meet new clients.
In the words of the Financial Services Authority (FSA) Independent advisers ‘should not be restricted by product provider, and should also be able to objectively consider all types of retail investment products which are capable of meeting the investment needs and objectives of a retail client.’
Restricted advisers will advise on a much narrower basis using a restricted panel of providers / solutions and not considering all of the available options on the retail market. A well-known firm of restricted advisers is St James Place.
What does this mean for clients? We believe that independent, unbiased and unrestricted advice is the only way for clients to receive truly professional and holistic financial planning. In 3-5 years, when all firms are Chartered and/or Certified, what is going to be the differentiating factor? Independence.
Why would a client want to deal with an adviser who cannot / does not consider all of the possible solutions available to them?
Chartered: more than just a symbol
Receiving financial advice from a firm of Chartered Financial Planners means you will have access to advice from the highest levels of professional financial planning. As at December 2011, only 2,880 individuals (Source: CII, Dec 2011) in the United Kingdom have achieved the Chartered title (from a total pool of approximately 50,000 registered Financial Planners), and only around 320 firms.
The Chartered title is awarded under the CII’s Royal Charter and strictly controlled by the Privy Council. Holders of the title must pass a series of advanced financial planning exams at degree level, in addition to the mandatory examinations held by most other financial planners, in the following areas:
♦ Taxation & Trust Planning
♦ Business & Corporate Financial Planning
♦ Advanced Pension Planning
♦ Advanced Investment Planning
♦ The Financial Planning Process
Chartered Financial Planners must also have at least 5 years (post qualification) experience, have subscribed to a strict code of ethics as prescribed by the CII, and have a Continuous Professional Development programme in place.
The Chartered title reassures potential clients that they will always act in their best interests in providing the highest levels of advice.
Why would you want to deal with a financial planning firm who wasn’t qualified to the highest level?
Financial education sits at the core of Essential Life Advice (www.elauk.com). We take time with all of our clients to help them understand the real value of money and how, if carefully planned, it can provide you with the future you always wanted.
Any questions about this blog, please contact Melissa Morris, CEO Network Locum (now Lantum) melissa.morris@lantum.com
