The Value of Financial Planning in Removing Mental Barriers

By: Ricky Chan
Director
IFS Wealth & Pensions

In October 2019, Eliud Kipchoge made history as one of the greatest marathon runners of all time by becoming the first person to run a sub 2-hour marathon, which was once thought to be impossible just as the 4-minute mile myth before it was broken by Roger Bannister decades ago.

To put this extraordinary feat and blistering pace into perspective, it means finishing a Saturday parkrun, which is a mere 5km, in just over 14 minutes (more than half the average finishing time) and then repeating this 8.5 times to match the marathon distance.

This was years in the making and not an overnight success – it underlines the meticulous attention to detail in organising, planning, training, and dietary management in order to give Eliud the best chance to succeed when the big day came.

In many ways, this is not dissimilar to Financial Planning as life is effectively a long marathon.

Financial Planning is a “top-down approach”

Financial Planning seeks to first understand what a client’s “bigger picture” looks like and developing a strategy to accomplish all their goals and milestones along the way.

It’s about understanding and accepting that money is not the end-game, but a mere medium used to ultimately help clients and their loved ones be ‘happier’.

Whether that means having a better quality of life, spending more time with family, pursuing passions, new experiences, or giving back to society.

There are no limits

In the same way then, Kipchoge’s “bigger picture” in completing the sub 2-hour marathon was not only to stake his name in history books, but also to inspire future athletes and show that there are no limits.

From there, they simply backward-engineered and mapped out the steps needed for him to achieve this incredible feat, including:

  • A training regime of running up to 140 miles a week
  • The formation of pacers acting as wind shields
  • Selecting the location in Vienna for its low altitude and straight roads.

They knew every small marginal gain and efficiency made compounds to make a big difference over the whole 26.2 miles.

A ‘bottom-up approach’ did not make sense

To be without a plan and vision of the future guiding from the top, would be like starting to design a training regime first without knowledge of the final racing distance, the weather and humidity conditions.

With financial planning done well, quality financial advice filters down to tackle the nitty gritty details on a micro level, such as making improvements to investments and delivering tax efficiencies to achieve the bigger goals quicker.

The value of financial planning lies in:

  • The process of listening
  • Identifying goals
  • Helping clients take action
  • Reviewing progress towards the goals set.

FInancial Planning is both rewarding and life-changing for advisers and clients.

Imagine a hypothetical client living in two parallel universes

This client has various investments and pensions, and is looking to retire in 10 years’ time so sought out some professional advice.

In parallel universe number one …
  • A Financial Adviser provides suitable financial advice to realign this client’s investments to match his moderate risk tolerance.
  • With the best will in the world, the adviser put together competitive products with a low-cost well diversified portfolio.
  • The client continued to save regularly and the adviser reviewed the portfolio annually.

Fast forward ten years …

  • The portfolio delivered exceptional returns above inflation and expectations. Fantastic.
  • Upon retirement, filled with enthusiasm the client proceeds with his retirement plans by taking some big holidays and doing some home improvements.
  • He feels he has enough money but this has never been formally checked.

Two years later …

  • What initially seemed like a comfortable nest egg suddenly doesn’t seem large enough especially after some withdrawals and stockmarket wobbles.
  • He now has doubts on whether he has enough money to last his lifetime
  • He cuts back on his hobbies and holidays, and even goes back to work part-time for the sole reason to ensure his investments last longer.

It’s a pity that the client never knew where he stood in relation to his “bigger picture” and whether he was ever on or off-track.

In parallel universe number two …
  • A Financial Adviser invested the time to understand what the client’s bigger picture looked like before formulating a Financial Plan.
  • This acted as a “road map” for the client to make his vision of the future a reality.
  • During the planning process, on top of his big holidays and home improvements costs, additional goals were uncovered and the financial costs of these factored in.
  • These were all mapped out, numbers crunched and stress-tested on a Cashflow Model.
  • Subsequently it was identified that there was a forecasted shortfall that had to be filled if the client were to have enough money to meet all his foreseen expenditures to live the life he wants.
  • To do this, the client was advised to take action by increasing his regular savings
  • A budget plan was drawn up to help him consciously track his expenditures so he focused on spending on things that were only aligned to his values brought him closer to his goals.
  • Suitable advice then followed on a micro-level just like in the parallel universe and ensured his financial policies were helping him move closer to achieving his goals.
  • Every year the financial plan was reviewed, goals revisited and improvements made, so that the client clearly understood the actions required from him and whether he was on or off-track towards his financial goals.

Being more focused on the bigger picture, led the client to look for ways to increase his income pre-retirement including renting out a spare room and working more overtime in order to save more to remain on track.

This with the option of bringing forward his retirement if he wished to do so.

Fast forward ten years …

  • There are no unwelcome surprises
  • With robust Financial Planning over the years, the client knew exactly where he stood in retirement and what the financial boundaries are.
  • He is able to live the life he wants, having laid the foundations and sowed the seeds in the years prior to his retirement.

Just as Kipchoge removed a significant mental barrier for future athletes, Financial Planning does the same for clients and shows what’s possible if there are no limits to what can be achieved through incremental gains.

Ricky Chan

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