Don’t just invest. Invest to a plan

While the vast majority of private clients hold investments – whether they are self-managed or managed at the discretion of a wealth manager – it is far less common for them to have a wealth plan. But where do you start with something that could make a big difference to your life? John Williams, Head of Wealth Planning at Nedbank Private Wealth, explains what High Net Individuals need to know.

Having spent over 25 years in wealth planning, there seem to be three main reasons why people don’t have a wealth plan: procrastination; not knowing where to start; or parsimony. Whilst these are all understandable, the message is clear: planning makes sense. You plan for most things in life, so why not plan your finances and provide for better outcomes for you and your family?

A wealth plan, meanwhile, goes beyond goals-based investing. This is where investors benchmark against a financial goal or goals and seek rather than set performance against an annualised return or a market index. This, in turn, helps align the investment risk/reward profile and timeline to the financial goal(s) that the client has in mind.

Investment performance is far more meaningful if progress is set against an actual goal, for example, whether the client can retire when they want, continue in the lifestyle to which they are accustomed, and help future generations

Of course, investment performance is far more meaningful if progress is set against an actual goal, for example, whether the client can retire when they want, continue in the lifestyle to which they are accustomed, and help future generations. But this is only one part of the solution.

What is missing are the other two important pillars of wealth management: advice and structuring (i.e. the use of ISAs, offshore bonds or pensions, etc.). Not only does a holistic wealth plan focus clients’ minds on all their financial goals, it helps them understand the how and when. It also ensures that there are a number of checks and balances so that people are more likely to reach their goals despite the hurdles and setbacks in life.

Six basic steps

The first key consideration to a plan is making sure there is a really good understanding of your (family) financial situation. Here, you need to set-out your assets, liabilities, income and expenditure. It can seem like a daunting task, but gaining a comprehensive view of the “here and now” provides the foundation for the future, not least as it is our experience that clients often underestimate how much they typically spend on day-to-day living.

Next is the setting of financial goals. These can be short-term (up to 5 years), medium-term (5-10 years) and long-term (over 10 years) in nature, and are ideally agreed with any family impacted (especially relevant in the context of inter-generational planning). To help, I’ve included some examples of clients’ goals currently being discussed:

Short term Medium term Long term
Move to a more rural location Retirement
Restructure buy-to-let investments Take up a NED position Fund a charitable cause
Start a business Ring-fence long-term healthcare finances
Fund children’s education Help children buy property Fund grandchildren’s education

Timelines, tax and realism

In collating the list in this way, we also start to get a sense of the timelines involved, which in turn helps determine which goals might be achieved through income and general savings. Meanwhile, medium and long-term goals typically involve investing. However, there are many other options available, for example, loans and insurance can also play critical roles.

Medium and long-term goals typically involve investing. However, there are many other options available, for example, loans and insurance can also play critical roles

This then naturally flows into the third step of assessing how realistic your goals are and whether you meet the pre-determined threshold for your “probability of success”. Given this is relatively high at a 90% probability, we develop a series of “what if” scenarios using a piece of software, called cashflow modelling, that maps out, in detail, what might unfold as a consequence of each of your financial decisions – options that vary significantly depending on your age, level of wealth, nationality and where you live.

It is only at the fourth step that we start talking about tax efficiency and whether your finances can be better managed. While Nedbank Private Wealth does not provide individual tax advice, we can work in conjunction with your legal or tax advisers. Through an appropriate use of tax efficient investment vehicles (known as wrappers), ensuring you use all your tax allowances, we can help to determine if there are any changes that could be made. This makes certain your wealth is working at its maximum efficiency for your future, and that the wrappers used are aligned to achieving goals

We then talk through the other options available to you. Insurance can play a part, for example, as UK families need to plan for any inheritance tax due given probate is typically only granted after the tax bill is paid, and yet many families need to access the estate’s assets to cover that cost. And you can borrow money to meet short-term financial needs beyond property financing, by securing a loan against your investment portfolio, without having to sell down your investments.

We then talk through the other options available to you. Insurance can play a part, for example, as UK families need to plan for any inheritance tax due given probate is typically only granted after the tax bill is paid, and yet many families need to access the estate’s assets to cover that cost

The sixth and final step then seeks to make sure that all the paperwork is in order – documentation that includes a last will and testament, as well as the different powers of attorney. We also set up a review process so you understand when and why the plan would need updating.

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Top Tip

Many of us first get into investing in a slightly haphazard way and can end up with several ISAs and pensions scattered about. Ensuring all your investments are being managed optimally and in alignment with an overall plan is a far faster path to meeting your objectives, but there is more that some wealth managers can do beyond goals-based investing e.g. helping you with life insurance or lending. Why not let us arrange for you to speak to a shortlist of experts who can quickly give you an expert view? 

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

The trinity of advice, investing and structuring

At each stage of these discussions, there are many reasons to get a professional to help with the heavy lifting. Coming back to my three main reasons as to why plans are not in place: procrastination soon stops when there is a clear timetable and an appreciation of the end benefits; any phobias diminish when you realise there is someone to guide you through the process through advice and mediate any difficult conversations; and – in my experience – the cost benefits of potentially lower fees through investment consolidation, which can compound significantly over time, as well as the potential to improve how tax efficient your finances are, soon dispel any parsimonious thoughts.

To make the most from your plan, it is the combination of advice, investing and structuring that ensures you are able to grow, preserve and transfer your wealth

Meanwhile, to make the most from your plan, it is the combination of advice, investing and structuring that ensures you are able to grow, preserve and transfer your wealth.

Why now?

For many, life during lockdown proved to be a time of reflection, as was the case for many of our clients. It might have brought about a broader view of life’s goals, such as happiness and health, rather than focusing purely on financial gain. Or embracing a life with more family time versus time at work. However, the future is always inherently uncertain, and especially since investing and financial decisions incur risk.

It is precisely these situations that show how valuable wealth planning can be given it helps to reduce unnecessary risks, and build in flexibility so that as life plan change, your end goals don’t have to

Life is beginning to return to relative normality, but the pandemic has highlighted how quickly and dramatically life can change. It is precisely these situations that show how valuable wealth planning can be given it helps to reduce unnecessary risks, and build in flexibility so that as life plan change, your end goals don’t have to. Perhaps it is worth an initial conversation to see how and why a wealth plan would help you.

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