When seeking to know what is financial planning, you will likely come across many different answers. As a professional who works in the industry, this article explores the technicalities of financial planning and some commonly used terms.
The Technical Answer
Financial planning is the part of the financial services industry that is licensed to provide advice on investments, superannuation and personal insurance. At first this might seem like a narrow focus, but each of these areas demands a deeper level of understanding of a wide range of subjects. These include:
In addition to having a thorough understanding of the investments themselves, it is also necessary to know the tax consequences of investing. This can get quite complicated where there are residency issues or where the assets are located offshore.
Other important concepts like volatility, diversification, compounding returns and asset allocation help drive superior results in this area. Investing is about establishing a robust portfolio of assets that will provide you with a combination of income and growth over the long term.
In my experience I have seen that a lot of Australians are guilty of thinking of investing as being the same as gambling, where the idea is to ‘have a punt’ on a speculative asset in the hope of a massive financial windfall. Too many times we have seen battle-weary punters seek professional help in getting proper investment advice when they finally realise that there’s no silver bullet.
Giving advice in relation to superannuation involves many other specialist knowledge areas. For some retirees it is all about saving tax, whereas for others maximising their Centrelink entitlements will help their assets last as long as possible throughout their retirement.
For most clients, good advice in this area involves helping them with the big questions such as “when can I afford to retire?” and “how long will the money last?” Later in life issues like medical spending, estate planning and aged care issues arise that will also require appropriate consideration.
Personal insurance might be the least glamorous out of the ‘big three’ components of financial planning – but maybe the most necessary. Insurance is a ‘necessary evil’.
In Australia we don’t seem to have many people just living off large chunks of family wealth. The vast majority of us have to work to support ourselves, so income protection is vital. For most of us, if we can’t work then we won’t achieve our goals, dreams and ambitions.
Life cover (also without subtlety known as Death cover) is all about providing support for those you might leave behind. TPD cover (Total and Permanent Disability) is usually payable where someone is unable to ever work again, so the sums insured tend to interact with income protection cover.
The last category of personal insurance – and the most neglected form of cover – is Trauma insurance. Trauma cover pays a lump sum on diagnosis of certain medical ‘trauma’ events. Heart attacks, cancer, stroke & coronary bypass surgery are known as the ‘big 4’ and account for approximately 80% of claims.
In summary, financial planning covers the three ‘big ticket’ items – investments, superannuation and personal insurance. It is not often that we see people getting these things 100% right, unless they have had professional advice.
For some people, addressing these issues can be quite daunting as it is hard to know where to start and who to trust. Reaching out and having that first conversation might be all you need to starting moving you in the right direction.