In my last blog Three Steps To Heaven I outlined my three simple steps to successful Financial Planning – Define It, Cost It, Fund It. You may recall that the two most important steps define your desired lifestyle and work out how much this will cost have nothing to do with financial products. It is only at step three – Fund It that we might consider financial products.
I have been in this business for nearly 25 years and it seems to me that, during that time, financial products have become ever more complicated. There is a multi-billion pound advertising and PR machine dedicated to convincing us that the final stage of the process is really complex. In fact “High Net Worth” or “Sophisticated Investors” are even allowed to opt out of the protections available under the Financial Services Act to access often complex unregulated products. Apparently, we all need the latest structured product linked to a combination of Mongolian tin futures, Tibetan yak farming index and Greek ouzo bonds. No we don’t!!!!
I would argue that, for somewhere between 99% – 100% of the population, simple is best.
A good friend of mine, Anita Gatehouse, is a financial planner in Kidderminster. Anita runs a Financial Planning firm called Cre8 Wealth Management and has just finished writing her first book, A Widows Guide To Financial Planning which will be published shortly. Anita asked me to read a draft of the book recently and offer some feedback. She has managed to distil often difficult concepts into a friendly easy to read format and I am sure the book will be a major success. One particular phrase in the book really stood out for me, “sometimes simplicity is the most sophisticated strategy of all.” Go girl! I wish I had written that line.
When it comes to selecting financial products to carry out the Fund It stage of our process (and this also includes protecting your plan using appropriate insurances) simple low-cost, plain vanilla products that are easy to understand and do exactly what they say on the tin are all the vast majority of us need. In fact, financial products such as Pensions, ISAs and Unit Trusts are not added value products as the marketing and advertising machine want us to believe but mere commodities – just like tins of beans. You may like the taste of Heinz or Branston but Asda or Morrison’s own brand probably have almost identical nutritional value. The added cost is in the packaging, advertising and buying prominent shelf space but it is unlikely to provide more energy for your body.
Often financial products advertise unique features, but unless you actually need these features you are simply paying too much for your beans. Financial products may come in “57 Varieties” but the truth is that deciding how much to pay into your pension or ISA, or how much life insurance you need (cost it), will make a far bigger difference than worrying about whether a Standard Life pension is better than Scottish Widows’ or any other company for that matter. And don’t get me started on premier bank accounts! Unless you actually need the “added value” features of a premier bank account such as travel insurance and breakdown cover (which you may already have anyway) you are simply throwing money down the drain. Two or three simple products that actually do what they are supposed to will often represent better value than one complex product; which no one fully understands and is riddled with exclusions.
Simplicity is also generally advisable when creating a Financial Plan. In order for anyone to commit to the action points in their Financial Plan they need to understand the reasons and the expected outcomes; a complex plan seldom gets implemented and followed through. Even if it does, it often leads to problems later when no one can remember why a particular course of action was deemed appropriate way back yonder.
Remember that selecting products is a commodity service with limited added value. Real financial planning focuses on defining your ideal lifestyle and working out the cost of achieving and maintaining it. Make sure that your Financial Adviser has the knowledge and experience to deliver the important parts of your financial plan and not just select tins of beans.