Our financial advice process- part 3: the advice meeting
In our last blog, we explained we would contact you to line up a time to deliver the advice. At our advice meeting, we will provide you with what is called a ‘Statement of Advice’ or SOA (financial planners love acronyms!). This is essentially a little booklet containing your unique financial plan. We will then explain that document and our advice during this meeting and answer any of your questions. The benefit of providing a Statement of Advice is you have a record to look back on at any point which is helpful as we will usually be covering a lot of topics.
The advice will outline where you are at and tell you about all the different superannuation, investments and insurance you hold. For many people, it can be helpful to understand what you already have and the fees you are paying.
Cashflow Recommendations- How much can you save?
The advice will then move onto cashflow recommendations. The first step in these cashflow recommendations is breaking down all of your costs of living. We will break this down into things like Car Registration, Childcare etc. and come up with what we consider your entire life costs on an annual basis. This can be a surprising number to many people as very few have ever sat down and worked out what their life costs.
The next step is we will compare this against your after-tax income to work out what your savings capacity is. If your expenses exceed your income, we will generally offer recommendations about how best to reduce your spending to increase your savings capacity. Our focus is not on telling you what to spend your money on but on bringing this to your attention so that you can formulate a plan. We see this as a partnership and only you are best placed to work out what you feel comfortable with.
Once we have formulated your current income and expenses, we will start planning out the future. For most of our clients, they are going through transitions in their life. This can include buying houses, getting married, having kids, changing jobs etc. This is obviously going to affect that savings capacity. We work out what this looks like by providing a break down of year after year and the changes as they occur. This way you can see what is coming up and how this is going to affect you.
We will generally provide a few scenarios here. In our experience, many people have a lot of options they are considering. Should they do private school? When should they start the renovations? Can you even afford them? We can run a few scenarios to see what the best combination of your goals is from a financial perspective.
The final step in our cashflow recommendations is we will use all this information and come up with a plan to automate your finances. This involves setting up multiple bank accounts and sending the correct amount of money to each one every pay period. For anyone who has read the ‘Barefoot Investor’, it is similar to the bucket approach but tailored to your specific needs.
Investment Recommendations- growing your wealth
For anyone with surplus income, we will provide them with investment recommendations. These recommendations not only take into account the types of investments that suit your goals, but will also include how much extra money you have to put towards the investment. It’s only after breaking down what your life costs to live in our cashflow section can be truly understand your capacity to invest.
Superannuation Recommendations- Planning for the future
We will then provide you with a breakdown of your superannuation and its performance. We may recommend a new superannuation fund and investment which is suited to your timeframe to retirement.
We will also address whether you should salary sacrifice to your superannuation and if so, how much. Salary sacrificing allows you to grow your wealth and reduce your tax which is a big win but we need to balance this with achieving your goals now and in the medium term. By understanding your life cost, we can come up with tailored recommendations that mean you save for your future but you don’t over-commit and go without now.
Insurance Recommendations- Protecting the financial plan
A great financial plan only works if you can continue to work and earn an income. If something was to happen which means you couldn’t go to work, even for a short period, this severely affects the financial plan. For this reason, as part of your plan, we consider your life insurance, total and permanent disability insurance, income protection insurance and trauma insurance.
We will provide recommendations on your needs for these insurances based on how much debt you have, whether you have young children and what your future plans are. We will then recommend an insurance product which meets your needs, is cost effective, and where requested, able to be paid for out of superannuation to ease the burden on your current cashflow.
A lot of our clients are parents of young children and have the most debt they will ever have in their lives being at the start of their mortgage so insurance, in our view, is really important.
We will also offer suggestions on estate planning to set you up with a plan to make sure that if something happens to you, you will be able to pass your assets to your loved ones.
Authority to proceed
At the end of the advice, we will have what is called an ‘Authority to Proceed’. This is where we summarise our recommendations and you can select if you would like us to implement them for you.
Our advice is just that, advice! You don’t need to act on everything we suggest and the authority to proceed is our opportunity to record what you would like us to put in place for you.
Next week we will discuss what happens once you give us instructions to put the financial plan in place.
This post is from our resident Financial Planner Ben Brett, check out his details in the About Us section.
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