Financial planning services are not particularly profitable for banks. It is much easier to sell a product to a customer quickly or swap Security A for Security B in the wallet and thus generate a commission or premium.
On the other hand, a detailed financial plan does a lot of work. You have to get all kinds of data and documents from clients. And very few customers have everything ready at once; It is not uncommon for weeks to collect all the papers together.
Consider all risks
Then you have to make your way through different customer contracts. Insurance, credit agreements with different interest terms and rates, corporate pension schemes, real estate – the spectrum is potentially huge.
Well-founded financial planning takes all aspects of risk into account. The issues of occupational disability, family insurance in the event of death, power of attorney and wills then come to the negotiating table. By then at the latest, many counselors will not be in the saddle nor have a network of professionals on hand who can provide the necessary assistance.
The quality of financial planning is affected by conflict of interest
Financial institutions often also face the problem of a massive effort that the customer pays for. Well, dear colleagues, if you always make clients accustomed to the fact that banking advice is supposed to cost nothing, then, of course, it will be difficult to charge for advice.
In traditional commission sales, fees are earned through the products sold. That is why many are beginning to “make” plans in such a way that in the end there is always a huge need for the customer to implement the product that urgently needs to be sold. This has nothing to do with objective advice. Thus, planning regularly leads to wrong decisions; Their goal is reversed.
Financial planning is “annoying”
The topic often has negative effects on clients. On the other hand, it means a lot of work to collect documents. On the other hand, being utterly preoccupied with issues such as one’s death and the financial consequences of the bereaved and realizing that one day you may not be able to act often causes pure stress.
Many clients also note that financial planning is often just an excuse to sell something, which is already practiced by financial companies – see above – in exactly the same way.
The Reality often overrides planning too quickly
And what is it all about – one is inclined to ask. After just a few weeks, the plan, with its many assumptions about returns, inflation and costs, is no longer true. After a few years, many predictions often become obsolete because not only economic assumptions, but also life appears differently than planned: career changes. A new job with a different salary requires a reconsideration of plans. Or there are children. Marriage may fail. And you can start counting again.
However, we are fully convinced that financial planning makes perfect sense for many clients. You just have to have realistic expectations, set the right goals, and draw conclusions from them.
Stay calm in an emergency
It certainly doesn’t make sense to infer how much wealth you’ll have by the time you’re 75 or 80. The periods are too long for that. And the assumed parameters should change only moderately – completely different results appear. Calculate compound interest over 30 years and instead of an annual return of 4.5 percent, assume, say, 5.3 percent: Results will vary worlds after a longer period of time.
So financial planning is not a detailed map of the unknown land of the future. Good financial planning is more than just a compass. It is very helpful to support clients in ignoring the short-term nature of the day-to-day business of the capital markets and focusing on the questions that really matter when dealing with money: Why is wealth important to me? Who am I responsible? How do I want to live?
If you also simulate stress scenarios like a stock market crash in planning, many clients approach crisis situations more relaxed in an emergency because they realize that their financial planning is still on solid ground. As long as you move within certain guidelines, it gives you more confidence to persevere even in difficult stages.
The initial financial plan is just the beginning
Of course, the plan should always be regularly adapted to changing circumstances. But this takes much less time than creating a financial plan for the first time. Finally, only the variable parameters need to be modified.
Above all – and this is the most important – financial planning is only the first step and the starting point for many other strategic considerations, for example:
- Does our family have enough protection if something happens to the main breadwinner?
- Can I afford to retire at age 62 or take unpaid leave in between?
- Can I really bear the dream of setting up a vacation property in Italy?
- When can and should I begin to pass assets on to the next generation in a tax-friendly manner without risking my own provisions?
- Do I have to make arrangements to enable my children to fund an expensive study abroad program?
- Do I need a Will and Power of Attorney? 98 percent of the time the answer is yes, you need it!
- When does it make sense to consider selling or handing over a business?
Addressing these issues without first getting a complete overview of the current financial situation is nothing more than looking through the fog and often becomes fragmented. This is exactly what the financial decisions of most people we meet usually look like: a series of individual decisions and thoughts without an overarching, recognizable concept—often without any rhyme or reason.
This will not happen to you if you set the right path ahead of time, develop a long-term strategy and plan, and then follow it step by step with the help of a competent advisor. Financial planning is the perfect starting point for this.
Yours sincerely, Stefan Heringer and Nicholas Braun
Note: You can find more on the topic of rational investor behavior, but also on how to make dealing with money happier, on the Neunundvierzig Honorarberatung blog and in Nikolaus Braun’s financial guide “Thinking about Money”.
Three more posts on the topic “Decision Wisely”: