The Difference Between Financial Planning and Financial Advice (Part 2)

In response to Phil Young’s article.

Great article Phil. I’m really surprised how few people have commented or rated it. It hits the nail on the head.

And you certainly nailed the description of ‘Financial Advice’ using the plumber analogy: Financial Advice solves problems that just need fixing – whether that be simple (sort my ISA) or more technical (a complicated pension issue).

Unfortunately, I’ve noticed that most Advisers (including, sadly, the vast majority of CFPs and Chartered Planners) are so busy being ‘problem fixing’ Financial Advisers they never get round to doing much, if any, Financial Planning. (Yet they parade as Financial Planners).

This is useful for the ‘Industry’ because this means Advisers are still doing what the ‘Industry’ wants which is focusing on the bit where IT makes money. It’s also natural for the Adviser because a) they’ve been doing this for years (it’s a hard habit to break) and b) that’s normally where THEY also make THEIR money. So proper Financial Planning just doesn’t get done. Of course those in the ‘financial planning community’ collude with each other and pretend that it does, but it doesn’t. That’s why there are millions of people across the UK – with money or without – who haven’t got a clue where they are heading financially, many of whom will be receiving inappropriate advice. (How can it be appropriate without Financial Planning?)

But Advisers claim “Ah, but the client didn’t want a financial plan, they just wanted their ISA/Pension/Investment sorted”. Or “they didn’t want to ‘pay’ for a financial plan”.

I believe these are just excuses, encouraged by the ‘Industry’ because it suits all involved, it helps everyone in the ‘supply’ chain to make money, just like it always has. Advisers can then quickly get to the bit where they think they earn their money. Big mistake. The world has changed.

Phil suggests ’Financial Advice’ is problem fixing. Which by its very nature is short term. I think we call it ‘transactional’.

But, it seems to me there’s a mismatch. With the banning of commission, Advisers are now focusing on building long term revenues, normally extracted by a ‘fee’ – explicit or (for the time being) less than explicit – from AUM. Sorry, but obtaining long term revenue from a short term ‘transactional’ service seems to me like a problem about to hit, no matter how often you ‘review’ the transaction or switch the money around. Sooner or later this model will fail. And Advisers will say “What happened?!”

This type of operation worked in the past, in a world of ‘smoke & mirrors’, of commission and ‘opaque’ trail ‘fees’. But not any more. How can it?

Other than becoming pseudo investment gurus, many advisers haven’t changed what they do, they’ve just changed how they’re paid. Now it’s more on the drip.

But now, and more so over the next two years, clients are starting to find out just how much they’re paying (and have been paying) for ‘Financial Advice’. And this is when the fun is going to start.

If the majority of Advisers agree that they ALL want more of the right clients, then those ‘better’ clients better start getting a joined up service. They’d better get MORE financial planning, and LESS financial advice. (i.e. less product sales / switching / churning).

When many clients are now paying £1,000, £3,000, £5,000 or £10,000pa or more in fees to their ‘Wealth Manager’ as soon as the penny drops that they are NOT getting what they could be getting for that money, those clients will leave.

And that’s the opportunity! At least it is for those Advisers that can understand, communicate and consistently deliver a genuine client focused financial planning service that helps clients to achieve, as Phil suggests, ‘a life well lived’.

Clients will say, (as they are already saying to the Advisers I train) “You mean I can get ALL of this, (i.e. Lifestyle Financial Planning)  without it costing me a penny more than I’m paying to my existing Adviser?!”  Answer: “er.. yep!”

To add to Phil’s distinction of Financial Advice versus Financial Planning I would to add one other dimension.

I’ve been promoting the idea since 1992 that a GOOD Financial Adviser wears ‘three hats’ – 1) Lifeplanner***, 2) Financial Planner and 3) Financial Adviser. Not only did I promote that idea, I delivered it. To EVERY single client.

Let’s get this straight. Lifeplanning is nothing more than doing a bloody good fact-find, to identify the sort of life a client has and the sort of life they want to keep. It will also include asking some simple questions (in the right order) to identify what needs to happen for each client to ‘live a life well lived’. ***It’s NOT about hugging trees, meditating, or bringing clients to tears. In the process of doing this ‘fact-find’ you obviously identify the financial products already held, together with incomes received & expenditure requirements going forward. When this has been done you can confidently move to the second stage:

Financial Planning. Knowing what your client wants to achieve (because of your GREAT fact-find), Financial Planning then identifies the resources available to a client right now (assets, incomes – i.e. the starting point), the resources that may be coming available in the future (future incomes / inflows) and more importantly for many clients, the resources that BETTER DAMN BECOME AVAILABLE to give that client the life they want. (This cannot be done without an understanding of a clients expenditure requirements throughout life combined with a meaningful lifetime cashflow. If it ain’t got a meaningful lifetime cashflow, it ain’t a financial plan).

Finally, the third stage of Financial Advice (independent or otherwise) which is the ‘product/solution/problem fixing’ advice concerning (and /or implementing) any financial products that MAY be necessary (if any) to achieve the client’s objectives identified by the Financial Plan – i.e. getting and keeping the life they want. (I personally believe that NO financial product should be implemented until the first two jobs have been done. Period.)

Unfortunately most financial products and investments have been sold – and are still being sold and implemented – WITHOUT doing the first two jobs. In the past this led to Advisers recommending unnecessary ‘sexy’ products, manufactured by ‘the Industry’, which just wanted (and still wants) Advisers to sell its ‘stuff’, and, more importantly get assets under management. But just look at the trouble that approach got us in to.

It’s still going on. With an ‘Industry’ intent on coming out with the ‘next shiny thing’ for Advisers to ‘sell’ or base their investment philosophy on, and with Advisers easily persuaded by the ‘powers that be’ no wonder so few Advisers are doing proper Financial Planning.

My fear is this; we have just one chance to create a Financial Planning profession. This requires that those calling themselves Financial Planners must stand up and be counted and actually DELIVER proper financial planning, to every client.

If they’re not doing so, then… please, please, please…. shouldn’t they stop calling themselves Financial Planners?

I’m sure you’ve heard this one: “If you always do what you always did, you’ll always get what you always got.”

For the ‘Industry’ that’s fine. For Financial Advisers, that’s not a good outcome.


13 thoughts on “The Difference Between Financial Planning and Financial Advice (Part 2)

  • There are some very good points here and I know a lot of advisers that think they know it all, but aren’t delivering the planning aspect. I’m a firm believer that “you never stop learning”, so if you want to stand out from the masses, you need to make the changes to the “how” and “why” of what you do.

  • Well said Mr Marmite! looking forward to Back2Y

  • My granny used to do her own financial planning by having different jars on her mantelpiece which were to hold money she put to one side to pay for future events. Like most others of her generation she also sorted out the end of her life as a priority by taking out a small life policy to ensure a proper burial.

    Lets not be too quick to criticise the past either as most of the money we now want to do financial planning with has come from the hard work of salesmen persuading people to buy products which have subsequently matured creating new wealth.

    I was privileged to be a willing trial user of the first 35 page Fact Find devised by Paul Etheridge back in 1984. Paul was advocating that we charged our clients to complete the Fact Find but I have to confess we failed miserably and the project went into the desk drawer with lots of other experiments.

    My own experience led me to work better over time with clients and to gentle practice what is now called Financial Planning as I won their trust. I always found it very difficult to begin a new relationship with a client with a whole raft of questions when I had done nothing to justify myself or to begin to earn their trust.

    By the way does anyone actually earn significant money from Financial Planning. I find it hard to accept that clients will pay good money each year to have a spreadsheet updated but will be delighted to learn differently..

  • Could have written it myself:)

  • I have been in this industry for nearly 10 years now and I consider myself a financial planner, and I like to think my clients would endorse this. I thought a perspective from a fairly young blooded adviser would give some interest.

    I think the problem the industry faces is “short termism”.

    As “IFAs” we are parallel to the banking industry and categorised as “sales people”. Until we start thinking long term this won’t change.

    What I mean by this is the way IFA businesses employ people. The majority of businesses put advisers on a target package that rewards for “sales” rather than on the performance of servicing/retaining of existing clients. It is after all much harder to gain new clients than keep existing ones.

    This is also a big barrier to our industry attracting new blood. As an industry we effectively tell new entrants to “sell” so that their employment is economical to the business. This needs to change.

    If we want to be well regarded as a profession rather than industry, businesses need to take longer term views with employees. They need to be well paid for servicing and advising clients and the culture of “selling” products needs to be phased out. This will automatically result in a better experience for the client who after all is the number 1 priority.

    There is major consolidation within the industry and hopefully this will change culture, however we will see over the next ten years whether anything has changed as a whole. What is clear, is that a small number of firms are leading the way and they have business owners that are looking at value tomorrow rather than profits today. These are the thought leaders within our industry and these are the people that inspire me.

  • Thanks Paul, a great article. Something which concerns me at the moment is the inability of some very technically qualified people to articulate this. There seems to be too much focus, when communicating with clients, on the ‘tools’ of the job (as vital as they are) – cashflows, platforms, rebalancing etc etc – and not as much on what the job actually is. Good luck with your Back2Y event.

  • Agree with all your comments Paul. May I add one extra benefit from providing planning.

    Over the years I’ve found that clients who don’t want to engage fully in the planning part of the exercise are the same clients who query fees and end up changing adviser at some point.

    Those clients who we’ve really helped to understand where they are going in life – and where they might want to go – are the ones who have remained as clients for 15 years or more.

    So working in the way you describe is not only best for the client, it also makes for a much more robust business model.

  • @Phil Melville
    Phil, how dare you mention PE on my blog. Wash you’re mouth out. And who said anything about 35 page fact finds or 400 page ‘reports’. You could be completely missing the point.

    Everyone, thanks for your feedback and support for this article. If you really do believe in Financial Planning, then stand up and be counted by coming to BACK2Y – The Alternative Financial Planning Conference. 13th March, next to NEC, Birmingham. No Product Providers. No Sponsors. No free golf balls or free umbrellas. Just PURE financial planning.
    Go here to book:

    Hope to see you there.

  • Hi Paul
    Looking forward to seeing you at Back2Y.
    There’s a big difference between a “cashflow” and a “meaningful cashflow” in my book. Some cashflow forecasts can drive out the meaning with their spurious accuracy and a lot of the cashflow forecasting programmes seem to encourage this loss of meaning.
    I wish something could be done to limit the use of the name “financial planner” – some of the banks now call their product salesmen and I guess it wont be long before product distribution gets renamed “simplified financial planning”.

  • A very good read Paul.

    An aspect not mentioned so far is the relationship we have with our fellow professionals.

    Typically, largely because the way they tend to work, introductions to us IFA’s from lawyers and accountants tend to be of a transactional nature.

    Promoting (and delivering) planning in addition to the transactional matter in hand, can really strengthen the relationships with our fellow professionals, enhance theirs with their clients and improve the clients outcome.

    Seems that many of those that have commented will be at BACK2Y. I will be too. Looking forward to it.

  • Excellent post as usual Paul A.

    Clients deserve to have the difference between financial advice and financial planning explained to them, in the same way we would expect the difference between independent and restricted ( or is that “tied” in old money) to be explained.

    Then let them choose which is the most suitable and beneficial for them.

    I am looking forward to the conference.


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