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Faith, hope, strategy

It is now time to start to draw to a conclusion this latest series of articles in which I have discussed certain important aspects of financial planning based on establishing and reviewing target levels of future income for clients and providing recommendations as to how these targets may be met.

Throughout these articles, I have contrasted this with a less structured approach which simply allows the client to invest as much or as little as they feel able in the anticipation that their future income needs will be met from accumulated savings.

I hope that advisers who were not already converts to the structured approach of target benefit-driven advice have found at least some of the discussions of interest. If not, it should be understood that an important part of the Sandler review strongly suggests that IFAs should pay much more attention to targeting, benchmarking and the appropriate use and review of future economic assumptions such as interest rates, investment returns and inflation. All these are integral aspects of target benefit-driven advice and have featured throughout these articles.

This week, I would like to summarise the main issues we have discussed, starting with a simple outline of the procedures involved in a recommendation based on a client&#39s stated future income needs (see right). By far the most crucial aspect of this procedure is the fact that, from outset, a number of important assumptions have to be made as to the likely future level of interest rates, investment returns, price and wage inflation and life expectancy. It is vital that these assumptions are determined in an appropriate way, paying due regard to investment and economic conditions. It is even more vital that the following are fully understood:

•The nature of the assumptions which have been made.

•Why those assumptions have had to be made.

•How the level of those assumptions has been arrived at.

•An assumption that the assumptions will prove incorrect.

•The effect on the plan of variance of the assumptions.

•The courses of action open to the client following variances in the assumptions made.

If all this sounds a little too complex, it should not. All we are saying is that the assumptions made at the start of the client&#39s strategy will almost certainly not come true and this will mean that changes have to be made to the strategy.

What changes? In these art-icles, we have been looking primarily at saving and investing for additional income in retirement (not necessarily through pension schemes), so variances in the assumptions will lead to three primary options:

•Increase or decrease contributions (depending on how the assumptions vary between each review) to maintain a realistic chance of achieving the required future income.

•Adopt a less or more aggressive investment strategy in the expectation of lower or higher future returns (a potentially highly dangerous option).

•Do nothing in full awareness that the future income is likely to exceed or fall short of the client&#39s expectations.

The adviser must ensure that the client is not expecting to achieve too much (or too little) from a given strategy but also that he expects the assumptions used in the strategy to change from time to time, so that he will have to amend his strategy if his future expectations are to be met.

So what, in summary, can be seen as the benefits to the client from this approach?

•Increased returns with reduced risk.

•Targeted returns.

•Realistic expectations.

•Understanding and appreciation of the need for regular reviews.

•Appreciation of the added value provided by the adviser

And the benefits to the adviser?

•Managing expectations.

•Structured and standardised approach to planning.

•Evidence of added value by the adviser.

•Justification of higher levels of fees and/or commission.

•Obvious need for regular reviews with the client.

For a little extra time commitment on a frequent basis from client and adviser, the potential rewards are considerable. I anticipate writing a further article or two on this subject after the publication of the Sandler report but I would strongly advise IFAs not to wait before taking action to implement the core aspects we have discussed over the last weeks.

This series of articles has covered only the framework for giving advice and has steered away from the technical nature of specific advice to clients in certain circumstances. It that technical detail to which I will return in my next articles, specifically, to the advice appropriate to small or medium-sized businesses with more than one proprietor. Pending the next article, you may want to think about the issues involved in giving advice on the calculations and methodology of establishing a share or partnership buyout strategy.

Keith Popplewell is managing director of Professional Briefing


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