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Planning v advice

The important thing in the debate on terminology is that the client understands what he is getting

What is the difference between financial planning and financial advice?

This is a good question. The financial services sector could be accused of setting out to confuse the consumer because it tends to use interchangeable terms to mean different things to different people.

You could equally have added into your question – what is the difference between financial planning, financial advice and wealth management?

Each of the terms is popular as a title for the delivery of financial services but is typically used by independent financial advisers. My answer, by its very nature, must therefore be subjective.

Financial planning is a term used to describe a process of analysis (the process consisting of a number of steps) usually revolving around some calculations to determine if certain identified priorities, goals and objectives can be achieved based on realistic and stated financial assumptions.

One tool used to determine if these goals are achievable is the lifetime cashflow forecast.

This is a calculation that shows you when your money is going to run out and, in a very simplistic example, might demonstrate that you cannot retire at age 55 simply because you will not have enough money in your pension pot to fund the retirement lifestyle that you claim you want.

The cashflow forecast is usually contained in a report that examines key aspects of your financial life, sets out the assumptions used and is based on the interaction between the consumer and planner in the establishment of the goals and objectives.

Some financial planners are so strong in their belief that financial planning is essential that they claim you cannot really take financial advice seriously until you have actually created a financial plan.

Some go even further and link in aspects of human feelings and emotions that are borderline quasi-religious in their approach (excuse my cynicism, but it is healthy).

Financial advice is generally considered more about the focus on certain aspects of a person’s financial wellbeing. There is crossover because, as the title suggests, advice is involved and the presumption is that advice must be based on the needs and wants, goals and objectives of the client.

There may also be a presumption here that financial advice might be more closely linked to financial product solutions than financial planning but I am not aware of any academic research that suggests financial planning does not equally result in a product solution.

Wealth management seems to be a popular title used quite extensively by intermediaries and others.

From the purist perspective, this is probably more about managing investments, savings and pension funds in such a way that the results make the consumer feel better about what they are achieving. Wealth management is probably used more commonly among advisers and managers who have a discretionary mandate over the management of the client’s portfolio.

The reality is that most of what is on offer to the consumer is a combination of all of these three things.

Establishment of goals and objectives is commonplace. This is sometimes followed (but not always) by forecasting of the possibility of these goals and objectives being achieved by existing arrangements.

This, in turn, is typically followed by the advice focused on suitable financial product solutions and one of those solutions might be the active investment of monies and labelled “wealth management”.

Your question is not easy to answer. These terms mean different things to different people but there is connectivity.

There may well be people who disagree with my definitions stated here.

From a consumer perspective, I guess the important thing is that whatever terms we use it needs to be clearly understood what you are, and are not, actually getting.

Nick Bamford is joint managing director of Informed Choice


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