Let’s say you inherit a large sum of money, or win the lottery, and decide to go to a financial planner to assist you with managing those funds. In most cases, they would follow the traditional approach to financial planning and follow four steps to determine what to do with your money.
The first step is to assess your tolerance for risk through a questionnaire, or they would simply profile you based on pre-conceived risk level categories, namely high -, medium -, or low risk. In general, if you were in your early twenties, you would be considered high risk and if you were over 60, you would be low risk.
Once your risk profile has been determined, they would start looking at your Asset Allocation. If you were profiled as high risk, your assets would predominantly be equity, whilst with a low-risk profile the focus would be on conservative assets such as bonds and property.
Your Asset Allocation will then determine the Return you get. In general, a higher risk yields a higher return in the long run, while low risk yields a lower return.
The type of return you get will allow you to lead a specific lifestyle. This means that if you had low risk and more conservative assets, you may not be able to lead the lifestyle you would like to.
At Client Care, we feel that this traditional approach to financial planning is fundamentally flawed as it is based on how you feel on a particular day while filling out a risk assessment questionnaire, or because you categorised based on factors such as age. Unfortunately, this has nothing to do with what you need your money to do for you.
Client Care follows the Lifestyle Financial Planning approach. We start with you – the client – and we ask certain questions to get to know you better. What is the lifestyle you currently lead? What is your dream lifestyle? What are your values and what is important to you? We uncover this and look at this first.
Once we understand what your ideal lifestyle looks like, we look at the return you would need in order to achieve those lifestyle goals over time and into retirement. At Client Care, we only look at real return, that is, return over and above inflation – that is what’s important.
The next step is to look at your Asset Allocation, which is determined by the return you would need in order to live your dream lifestyle. If you need a higher return, you would need more equity in your portfolio.
Your Asset Allocation will have risk associated with it, although a fairer word would probably be volatility. Risk indicates that you could lose all your money and Client Care would never advocate investing in such assets. Volatility refers to the ups and downs that are to be expected over periods of time.
If you as a client is unhappy with the level of volatility that you would need to be exposed to in order to achieve the desired return, we go back to your lifestyle and consider which trade-offs can be made in order to balance the risk. This could be things like keeping your car for a bit longer or driving a more affordable car.
By using the lifestyle financial planning approach, we help you understand what you really need versus what you might just want. This allows us to help you live your dreams.