This is according to Henry van Deventer, head of Wealth Development at Old Mutual Wealth. Van Deventer says there are major benefits to engaging a financial advisor to guide you through the process, the most important of which is that they can provide an independent view and help take the emotion out of your financial decision-making by helping you consider the various aspects of your unique circumstances.
"An advice-led approach can help you make the right decisions regarding your financial future in a systematic way, by assessing where you are now in your financial journey, where you want to be in the future and how to best get there. This process starts with a lifestyle and objective assessment, before determining the return required to achieve these. Financial advisors will also help plot your various life stages and corresponding income requirements.
"This advice needs to be overlaid with a behavioural finance model which can help to illustrate the impact of emotional decisions on investments in order to further help investors to make more informed and sound financial decisions. It is often very difficult for individuals to separate the current income they need to live off and the income they will need to derive from their investments to fund their future needs," says Van Deventer.
"Their income needs to increase every year to keep up with their future requirements and they need to become aware of how their investment behaviour will impact on this if they don't apply the discipline needed in terms of their bigger picture."
When it comes to optimising investments, financial advisors and asset managers are critical for providing insights on the potential returns from the various products available as well as the most appropriate spread over the various asset class to select the optimum combination of investments at the right time.
"The way in which lifestyles and family structures have changed, and the number of choices available given the increasing complexity of the investment environment coupled with all the ongoing impacts of market forces like interest rates and inflation, makes financial advice essential to help you understand your best options."
Some investors are unrealistic about what returns the market can produce and instead close their eyes to the portion of current income required to replace future income during retirement. Once one goes through the wealth calculation it easier to get to the magic number. And based on this, your ongoing expenditure in lifestyle assets such as increasingly lavish primary residences, holiday homes, cars and other items should raise warning flags. Earning a good few million rand a year without curbing your expenditure will clearly jeopardise your investment strategy.
"Because of all the various competing needs you continually have to consider when it comes to managing your expenditure, this kind of advice will help you to determine what is really necessary versus what is merely desirable and lifestyle enhancing in the short to medium term.
"The big balancing act is to put away sufficient income over the long term to ensure your assets deliver a large enough return and provide sufficient growth without needing to tap into your capital in later years.
"Each financial decision will affect the returns on your investments, which will impact on your future needs which clearly depends on the returns generated." Where a financial advisor adds further value, is to help motivate you to remain focussed and stay the course to achieve the set goals.
"Because your needs will continue to change depending on your various requirements at each stage of your life, such as funding your children's education, going on overseas holidays, buying a new car and the like, there is great value in having an advisor to help you map these out against a time horizon." Additionally, tax, estate duty and liquidity considerations are major factors that an advisor will be able to bring into the equation.
"Financial advisors are well versed in the science behind ensuring your portfolio stands the test of time. Once you have gone through a thorough planning process you still need to make adjustments to ensure you are not exposed in any particular area. Another way the financial advisor adds value is to help you review the plan regularly to take into account the changing financial environment and your needs over time," he concludes.
