The Pitfalls and Traps of Financial Planning

financial-planningIn my last article, I focused on the first stages of accepting financial advice; choosing an advisor and having an initial meeting with him or her (a fact find meeting).

After the initial meeting you should then have been presented with a full and formal summary of your discussions, needs and goals, and an initial recommendation based on the information and requirements you gave.

The second meeting should focus on ensuring that this recommendation is correct and in line with the requirements and tolerance for risk provided by yourself at the first meeting, and possibly any other areas that your advisor has identified that need to be addressed that you may not have thought of.

When considering whether the advice does meet your needs, it is important to understand the impact should your circumstances change. What happens if you are repatriated or moved to a different country? What are the potential tax liabilities both now and in the future (don’t believe any advisor that says there will never be a tax liability with an offshore investment!)? What if you find yourself unable to maintain any contribution? What are the implications of stopping your investment or accessing your funds if you need to before maturity?

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Andrew Bartlett

One of the biggest complaints I receive from people I meet who have taken advice from less scrupulous advisors is that they were not told (or sometimes blatantly lied to) about lock-ins, penalties and surrender values, usually when discussing long-term contractual savings plans.

Unfortunately (and this is a well-known and frequently discussed problem within the industry), long term contractual savings plans are very actively sold, usually for one reason only… they pay massive, up-front, indemnified-commissions to the advisors. These types of investments pay an initial commission which is multiplied by the term of the investment, and as long as the investor funds the “Initial Funding Period” (normally 18-months) the advisor gets to keep this commission. If the investor fails to maintain the regular investment until the end of this period, the commission will be “clawed back” from the advisor (and the investor will also lose everything he has invested).

It is also important to understand that any regular premium investment is designed to be fully funded until maturity. Although there may be flexibility to stop or reduce premiums, the investor will always be penalised in some way or another (directly or indirectly). At Farringdon, we do not advise clients to take long term contractual savings plans. Our view is that the client is better taking a short term investment (typically five years), and then upon maturity we review his circumstances and then make a further recommendations. This maximises his flexibility and helps ensure that the advice is always current for his needs at the time.

However, assuming what has been proposed does meet your needs, the advisor should then provide you with a full disclosure of the terms and conditions of any product recommended, along with any charges you have to pay for both the product and the advice given. My key piece of advice at this stage is do not enter into any contract until you have read and understood the terms and conditions. If they have not been provided, ask for them. If the advisor cannot or will not provide them… thank them for their time and walk away. You should never be pressured into something you do not fully understand!

In my next article, I will focus on product and fund charges, how they are often hidden and how they affect you. As always, if you have any specific questions for me or would like some professional advice, please feel free to email me at abartlett@farringdongroup.com