In his well-known book Principles, Ray Dalio, founder
of Bridgewater Associates, wrote the following: “I learned a great fear of
being wrong that shifted my mindset from thinking “I am right” to asking myself
“How do I know I'm right?” and I saw clearly that the best way to answer this
question is by finding other independent thinkers who are on the same mission
as me and who see things differently from me”.
I consider this to be a profound statement and what Dalio is actually alluding to is that we shouldn’t simply trust our own thinking and that we need someone to challenge our thinking – to just we are right, is risky business. Considering the complexity of today's investment markets and the fact that we’ve had to face two global events, the financial recession in 2008 and the ongoing global pandemic which started in 2020, the question we really need to ask ourselves is if we can really afford to go about navigating the choppy investment seas on our own?
In this article I will explore 5 essential investment elements that you need to discuss with your Financial Advisor to allow for critical conversations, to plot your future financial needs, and to identify the most appropriate investment vessels you need to employ in order to get there.
Here are 5 essential conversation you need to have with your Financial Advisor.
1. WHAT IS YOUR CURRENT FINANCIAL STATUS?
Your first appointment is important as this will set the tone for the relationship and be an opportunity to clarify expectations from your and your advisor’s perspectives. In order to do this well you will need to do some essential preparations including:
·
Listing your current asset and debt-levels.
·
Giving a brief career overview and a rundown of your career goals.
·
Summarising your current retirement timelines and investment plans.
· Clarify your ideal financial position and lifestyle.
2. WHAT IS YOUR VISION FOR YOUR FUTURE WEALTH?
People tend to shy away from this discussion because
in most cases it means being really honest with yourself and your advisor. This
is what we call a heart-to-heart discussion.
If your Financial Advisor is tasked with the responsibility of helping you plan and grow your wealth, it’s fair to expect you to be realistic about your own expectations and financial limitations. What makes this particularly hard is that we have to be honest about our own spending habits (good and bad) and the true status of our finances. This can be a difficult conversation so be prepared for some tough comments and observations. Remember you are trying to rectify and align your finances to achieve your long-term goals and dreams.
Your financial advisor will also, in time, become the steward of your financial investment and wealth plan, which means you have to create a relationship based on integrity and trust. To be true to this relationship also means you have to articulate your financial dreams to your advisor, and work together on an agreed plan, to give flight to your vision of your future wealth. Make sure you explain and communicate precisely what that vision means in real terms, and that the plan to get you there is regularly assessed and reviewed.
3. WHAT ARE YOUR SPECIFIC FINANCIAL GOALS?
In many aspects of our lives, we are told by personal development gurus to break down our main goals into smaller sub-goals. It’s no different when it comes to your financial and investment goals. Start with the macro goals such as owning a number of investment properties at retirement age, and then break that down into smaller goals such as owning at least one paid off bedroom flat in the next three to five years, as a first step. Commit to these goals in writing and let your advisor add this to your investment action plan.
Goals have to be SMART (specific, measurable, attainable, relevant, and time-bound) and should be regularly assessed. A goal such as “having lots of investments” isn’t really a measurable goal. Without clear goals it’s unreasonable to expect your financial advisor to develop an effective action plan. Clear goals also make it easier to measure your progress which should be measured two to three times per annum as this will quickly highlight poor performing areas or unrealistic investment goals.
The extent of your financial goals and dreams will greatly influence the kind of investment plan your financial advisor will develop. If your goals are bold, it will require a bold investment plan, if your goals are more tempered a more measured investment plan might be the answer. A critical factor to the investment plan is therefore to understand one’s investment risk and tolerance profile. In many instances Financial Advisor can do an investment risk profile analysis which will explain the kind of investment profile you possess and propose investments that are interpretive of your appetite for risk.
4. WHAT IS YOUR FINANCIAL ADVISOR’S INVESTMENT PHILOSOPHY?
This is a two-part question and covers two key issues; firstly, your financial advisors’ qualifications and experience, and secondly your advisor’s investment philosophy. Both these matters will have a direct influence on your investment plan and the way your financial advisor will go about investing your funds.
Make sure that your financial advisor is equipped with
the necessary qualifications to act as a financial advisor. Regulatory bodies
and institutions as well as certain professional financial professions (such as
actuaries, auditors, and accountants) need to meet minimum qualifications, compulsory
accreditations, and registration with formal bodies. The Financial Planning Institute (FPI) and the Financial ServicesConduct Authority (FSCA) are two specific bodies that regulate Financial Planners and
Advisors and provide you with the minimum required qualifications. Make sure
you vet these qualifications and try to obtain at least one personal referral
before settling on a specific Financial Advisor.
The
second matter, which is equally important, is understanding your financial advisor’s
investment philosophy and to ensure that it also resonates with your own
tolerance to risk and investment approach. This will become important as you need
to select investments and as your wealth and investment plan grows over time. An
initial mismatch between you and your advisor need not be a concern but needs
to be addressed sooner rather than later. Make sure you select a financial
advisor, from the start, who resonates with your own investment philosophy. A
significant role of the new generation of financial advisors is to act as
educator, mediator, and mentor when it relates to financial investment
decisions. Make sure your financial advisor is somebody who you will listen to when
it matters, especially when your finances come under pressure.
5. HOW WILL YOUR MONEY BE INVESTED?
Once again, the answer to this question will depend to
a great degree to the kind of investor you are. Certain types of investors want
to be part of the investment process and would like to know what kind of
investment vehicles the financial advisor is currently considering. For the
most part, clients rely on the financial advisors’ expertise and knowledge of
the markets to select the appropriate investment vehicles and products.
The more
informed investor with a good working understanding of technical analysis and
investment vehicles, is more likely to get involved in key questions such as
the appropriate asset allocation and investment spread between securities, fixed
property, investment funds, derivatives, bonds, commodities, or other asset
classes.
Another essential element of the investment cycle is
to assess the selected investment vehicle and product performances. The logical
question to ask is what financial benchmarks your financial advisor uses to
make these assessments? In other words, how do you and your Financial Advisor know
whether your investments have performed good or bad? It's also important that
the benchmark used is relative to the kind of investments your financial
advisor has selected for your portfolio. It might be a promising idea to ask a
number of financial advisors to share their investment philosophies and the
type of benchmarks they use, before appointing your Financial Advisor.
CLOSING COMMENTS
Your relationship with your Financial Advisor is based
on trust, integrity, accurate financial information, and up to date trends and
performance data. But it’s more than just that, it’s also a personal
relationship, based on a mutual respect for each other’s thinking and
philosophy on life. Ideally, you should be working towards the same outcome,
which is financial independence and wealth creation, over time, which is why it
is so important that there's a good match between client and Financial Advisor
from the beginning.
There
is a well-known joke about the client asking his financial advisor “is
all my money really gone?”
“No, of course not,” the adviser replies.
“It’s just with somebody else!”.
Although said tongue in cheek, this is precisely the kind of scenario which we are trying to prevent at all costs; the gradual loss and erosion of our investments, savings, capital, and funds. It is critical therefore, that we continue to review and assist our wealth creation and wealth protection strategies. Try to secure a couple of detailed conversation per year with your Financial Advisor, even if just to test your own thinking or to discuss new investment ideas, it will be a worthwhile investment (pun intended) and will bear fruit over the long-term.
Oakfield Wealth Management is situated in Durbanville and a continuation of Thompson Financial Services.
With an active client base in the Western Cape and more than 20 years’ experience in the independent financial advisory and insurance industry, clients have access to wide range of services, expertise, and investment skills.
For more information call Gerald Thompson on +27 83 326 8276 or send an email to gerald@oakfieldwealth.co.za .