Just what does a Financial Planner do?
Coming up with a suitable strategy and recommending suitable investments is an obvious job, and is the one that attracts the most public attention.
However, another job that can be just as important, is helping clients make better financial decisions. Your financial planner should be able to engage with you on a range of issues, help you clarify the different options that are available to you in a given situation, and choose between the alternatives.
An example will help. The following example is not based on any one client interaction, but is an amalgam of real world examples. You could say it is “inspired by true events”.
A retired couple were looking to buy a new car. They were recently retired, and cashed up. The had always bought cars in the $30,000 to $40,000 range, but this time they were thinking of a top end four wheel drive, costing around $75,000. They used their car for short country trips, and suburban commuting, and did not see that changing. They did, however enjoy overseas trips every year or two, depending on finances and opportunities.
Should they buy the four wheel drive, or a mid-range car around $35,000.
The discussion went like this:
• The most important thing to look at, is the “opportunity cost “ if you choose the more expensive option. If you buy the more expensive car, you will have $45,000 less, and thus given up the option of spending this on a range of other things.
• The amount of $45,000 will pay for a lot of overseas trips. If you buy the 4 wheel drive instead of the mid-range, you will be paying between 2 and 4 overseas trips, just for a bit of extra comfort and status (and let’s face it, status is often a big factor in these decisions).
• Then there are the foregone earnings. If you buy the mid-range, car, you will have an extra $45,000 invested and earning. At 7% (which is about the current grossed up dividend yield), this is an extra $3,150.
• Finally, there is the higher running costs of the more expensive car (fuel, servicing, insurance, depreciation).
• Add it all together, and the difference between the two is very considerable. Many thousands of dollars a year.
Opportunity cost is one of the most important costs involved in making any financial decision – but it is easily overlooked.
A financial planner should be able to help you work through situations like this, and come to better decisions.