Written by Mark Salter

If you’re seeking some financial advice, whether it’s searching the internet comparison sites or speaking to a professional, you may already have a loose reason on why you want to invest or some pre-set ideas or a particular financial goal in mind. For example, you may be saving for the deposit for you or your children’s first home, investing money outside of your business or looking to consolidate numerous pensions you have accumulated during your career.

For others, it might be looking for the best fund to invest in at the moment or how much of their portfolio should be investing in the UK or emerging markets. They usually what to know ‘how’ they can invest and ‘what’ product is right for them.

As a financial planner, I believe it is best to put the ‘why’ at the first step of the financial planning process. Knowing why someone wants to invest is essential before we even begin exploring the ‘how’ (type of account) and the ‘what’ (the right savings or investments).

The importance of ‘why’

Understanding the why has helped some of the world’s most pioneering and successful business owners from Richard Branson to Steve Jobs. Simon Sinek’s bestselling book Start with Why explains this and according to Sinek, in business it does not matter what you do – it matters why you do it.

In financial planning it is the ‘why’ which gives the underlying reason or need of the person to invest. Once we understand the ‘why’ we can look at the ‘how’ and ‘what’.

Here are a few case examples

Time

A young couple want to buy their first home within the next 2-3 years. It does not make sense to invest in stocks, as the volatility of the stock market could result in a drop in value when they want to put an offer on a house they find.

A better course of action would be to put the money into a savings account or premium bonds where they receive a more reliable, albeit lower, return and the value of their hard earned savings will not fall and be available to them when they need it.

Let’s now imagine the same couple want to start investing for their own retirement and could be investing for the next 40 years or more. The plan would change – a portfolio with more stocks makes more sense here, even with the risk of added volatility, the longer time period increases the chance of achieving a significant return above inflation.

Understanding the couples ‘why’ (goal and timeframe), allows us then to help with the ‘what’ and ‘how’.

Flexibility

A business owner would like to start investing outside of their business so they become less reliant on the business and be in a position to reduce the amount of time they spend working. They aren’t certain whether they will need access to these funds before or during retirement and have always dreamed of buying a holiday home when the children finish university. They want to invest with flexibility in mind and have the option of accessing some or all of the funds when they need them.

Understanding the ‘why’ (desire of flexibility), allows us to guide them on the ‘what’ and ‘how’.    

Age

A 21 year old is entering the workforce, debt free after completing her studies. She doesn’t have an early retirement goal now but joining her workplace pension scheme and saving 10% of her income should put her on a successful pathway to building up funds for retirement.

This young lady has many years to achieve her retirement goals, so only small steps are required today, freeing up more income for her to save or invest towards other financial goals.

On the other hand, a self employed builder in his early 50’s with very little retirement savings, but who wants to retire in the next 10-15 years, would need to make up for lost time. With a much shorter timeframe they cannot count on as many of the benefits from compounding growth. A greater percentage of his income will need to be saved.

These figures aren’t meant to scare anyone but if you achieved long term growth of 6% per annum from an investment portfolio and wanted to build up a fund of £200,000 by your 65th birthday, a person aged 21 would need to invest £80 per month compared to a 50 year old who would need to invest as much as £694 per month.

In both these cases, knowing the why (age implications) helps us advise on the ‘how’ and ‘what’.

Financial advice vs financial planning

Traditional financial advice focuses on the what, before the how, with the why finishing last. This approach can lead to undesirable outcomes.

Real financial planning explores the why before the how and then the what. This process is much more effective for addressing the clients underlying needs and expectations.

May 2020