WHEN FINANCIAL planners are asked at parties what they do for a living, many hesitate to be specific. Why? Because the inevitable follow-up questions relate to where they think the stock market, the dollar, interest rates or the economy are headed.
It’s a myth that dies hard—the idea that a financial planner is a market prophet with special powers for foreseeing the next big boom or bust. To be sure, some advisors position themselves as smart forecasters or market timers.
The best planners, however, will tell you they have no idea where the financial markets are headed. They can’t tell you which will be the top- and bottom-performing stocks this year or what the Federal Reserve will do with interest rates.
Of course, lots of folks have an opinion on the economy, the efficacy of government policy or what the markets might do next. But good planners know that’s the sort of conversation best held at a local watering hole, not in the context of planning a client’s future.
A financial plan should not be shaped by market forecasts. Rather, it should be shaped according to the needs, goals, risk appetites and life circumstances of each individual client. In this sense, good financial planners are not experts in prophecy but in possibility.
They start by spending time with clients or prospects to learn about them. They need to know not only about their assets, liabilities, income and living costs, but also about their aspirations and expectations. From there, goals are set for the short, medium and long term.
The advisor connects those goals to a portfolio strategy that gives clients the best chance of both achieving their goals and sticking with their investments along the way. A short-term market forecast isn’t required. True, if the goal is long term, planners will need to assume a reasonable expected rate of return.
The key to earning that return is not market timing or stock selection, but diversification and discipline. The stock market will have more good years than bad, we know that. But there will be bad years, so a plan needs to accommodate those by including bonds and other defensive assets.
Not every sector of the market will perform well at the same time, which is why a plan will diversify across and within many stock market sectors. That means having exposure to large and small companies, value and growth stocks, and developed and emerging markets.
Cost is another determinant. The fees paid to fund managers can be a significant drag on the returns delivered to clients. The plan will consider the most efficient solutions. Taxes, too, can make a difference between the advertised returns of various strategies and what ends up in an investor’s pocket. A good financial plan takes account of that.
Finally, no plan is ever set in concrete and forgotten about. There are two reasons. First, markets are always changing. This can move clients’ portfolios beyond the bounds of their risk appetites.
Second, people are always changing. We change careers, relationships, build families, move house, and face periodic challenges with our health and external circumstances. Plans need to be reassessed, portfolios rebalanced and goals reset, if necessary, to accommodate all of that.
The point is that none of this requires making bets on the future. It requires a financial plan that accommodates a wide range of possible developments and builds strategies to deal with whatever arises—an economic recession, an industry restructuring, a marriage breakdown, a health crisis. Just life really.
A good planner knows that the investments, once structured and set, will largely look after themselves. They must be monitored and measured, of course. But the most important element is the clients themselves and their lives.
The many variables that make the nightly TV news—geopolitics, rising markets, falling markets, currencies, interest rates, commodities—are all very interesting and we can debate them until the cows come home. But none of that is within our control.
What a financial plan does is start from what we can control. It starts with understanding each client’s goals and preferences, building strategies that maximize the chance of meeting those goals, managing risk through diversification, controlling costs and taxes, exercising discipline and regularly rebalancing.
The controllable stuff may not be as interesting as the big political or market story of the day. But it’s here where your planner makes the real difference.
Robin Powell is an award-winning journalist. He’s a campaigner for positive change in global investing, advocating for better investor education and greater transparency. Robin is the editor of The Evidence-Based Investor, which is where a version of this article first appeared. Regis Media owns the copyright to the above article, which can’t be republished without permission. Robin’s previous articles include Death by Lifestyle, Take Courage and Why We Try. Follow Robin on Twitter @RobinJPowell.