Baxter Fensham Limited Financial Planners - Financial Planners, Wealth Managers, Tax Planners

This article by Simon Fitton appeared in the publication ‘Dental Practice Health Check’ by Lesley Bailey, http://www.amazon.co.uk/Dental-Practice-Health-Lesley-Bailey/dp/1846192110, a business coach assisting dental principals transition their practices into businesses. Although designed for dentists, the message still holds firm for any walk of life.

Business and Personal Financial Planning

The previous article highlights the importance of management information and reporting, enabling a more efficient and profitable business model. The result of getting this right makes for a more enjoyable working environment for all the staff as we all feel in control. It means that we can set time aside to work both ‘in’ and ‘on’ our businesses, and to look at the kind of lifestyle that we would wish to enjoy, now and in the future, away from our places of work.

One of the major pitfalls of financial planning is that business owners continually separate business from personal, but the reality is that they are inextricably linked. There are valuable tax reliefs available through a business, that are different to the personal tax regime, but so often these are captured at the expense of the other. Furthermore, by seemingly providing a solution within a business, a problem may be compounded when one’s personal finances are considered. Let’s consider some of the issues:-

How many business owners rely on the sale value of their respective businesses to provide a retirement income when they stop work? Does goodwill exist today? Do you own the property that you operate from?

How can an owner extricate monies from the business now, and what are the tax implications?

Should I incorporate? What are the financial benefits of this action?

What impact will the new contracts have on my earning ability, and what are the implications of my practice moving away from the NHS to a fully private practice?

How many businesses have restrictive partnership agreements in place? Do they even have a partnership agreement, and if so, how would it cater for one partner’s family in the event of him or her having a long term illness or even dying.

In 2006, there was a change to pension regulations called ‘simplification’ and this brought with it greater clarity and flexibility, together with much larger contribution scope. However, there was also a lifetime limit introduced, and if your pension fund exceeds this limit, then there will be penalties to pay!

Some of these issues are not new, but they have a renewed layer of importance attached by dint of regulation changes. It is so important that you talk with specialists that understand the nuances peculiar to your profession, and to that end, personal and business planning should be aligned.

What kind of lifestyle can I have?

Yes, this must always be your starting point, as you need to quantify what it is you want from your life so you can prioritise how to achieve your objectives. Remember that a want is distinctive from a need. One may NEED food, clothing and shelter but may WANT caviar, luxury goods and a holiday villa. We are not all the same and indeed not everyone is materially aspirational; some may prefer a more conservative protection of accumulated wealth.

Some questions you could start asking yourself could include:-

• What you do away from work? Any plans to take up other hobbies or interests in the future? What is stopping you doing them now?
• How do you feel about your job? Is it a necessary evil or do you really enjoy what you do? How do you see the future as far as work is concerned?
• What does retirement mean to you? For example if you are in good health, will you keep working even though you could afford to retire?
• Will your retirement be a well earned extended holiday filled with foreign travel and spoiling grandchildren, or will it be cold winters with the heating on low and too much day time television?

After interrogating what you want from your life, it is vital that you create a ‘context’ for any planning that you do. One of the most powerful and empowering tools available to you through an independent financial planner is a ‘Cashflow Modeling Analysis’ or ‘Lifeplan’.

Create a Lifeplan

You need to understand the relationship between what your objectives are, the amount of risk you are comfortable with and how much money you are prepared to commit. These are the strategic decisions that you need to consider.

The first thing to do is to organise your current affairs into a financial plan. You should be given tools to help you determine what you will be spending your monies on at different stages of your life. This demonstrates how far your existing arrangements come to helping you achieve your financial goals. It will also enable a planner to identify areas of weakness and vulnerability. The most important purpose that this exercise plays is that it helps identify and quantify any shortfalls you may have in your planning as it stands.

The next stage is to meet to reaffirm your objectives by interrogating your cash-flow model. This would outline the strategy you should adopt to achieve your objectives. This will incorporate wealth creation, using a structural investment process, or wealth preservation to ensure that once financial independence is achieved your position is protected.

This plan would then need to be underpinned with insurances to guard against illness or death; you don’t want your plans to fail because of this.

Investment Solutions and Wealth Management

Mark Twain once said “There are two moments in a man’s life when he should not speculate: the first is when he does not have the means, the second is when he does.”

You need a financial planner to help you to manage the relationship between the risk of your portfolio and the amount of money you need to invest to achieve your objectives. It therefore goes without saying the more successful your investment experience is the happier you will be with your planning in general. This can be achieved by:-

• Varying the ratio of equities to short term bonds to meet your risk tolerance.
• Spreading risk as far as possible through Global Diversification.
• Using a mix of Domestic, Foreign and Emerging Market funds.
• Using short term, lower risk, high quality bonds to meet known or probable cash needs.

You could construct a huge roulette wheel of the hundreds of active fund managers out there and “gamble” on which one will have predicted the right firms, in the right sectors, in the right markets, at the right time and do it consistently EVERY year. Alternatively you could simply take advantage of the vast amounts of academic research that has won Nobel Prizes, costs less and is bespoke to your individual requirements.

Risk plays an integral part to financial planning. The dictionary defines risk as:

‘the possibility of suffering harm or loss; danger’

When most people think of risk associated with money they think of the negative. This is probably because we are conditioned to think of risk in terms of loss. After all, if someone says something is risky they don’t tend to see the positive side! However, there is a positive side to risk. Every day on the stock-market money managers are using tools to reduce the amount of risk involved.

No risk, no reward: There is no such thing as a risk-free investment. In order to build assets, you must undertake some type of risk. Greater potential return is the reward for undertaking greater risk.

Choose appropriate risks: Know and understand the risks involved in various savings and investment vehicles. Make sure you are comfortable with the risk level of the investments you choose.

Manage risk, do not try to avoid it: Diversify: holding a variety of investments and shares lessens the negative impact of an investment that performs poorly. Invest over time to offset market fluctuations. Monitor your investments to be sure that the risk/reward guidelines you have set have not changed.
Maintain a long-term perspective: Plan to own funds over a long time to help lessen the effects of price fluctuations and market volatility.
The problem with defining risk is that your personal definition will be based on your experiences, knowledge and perception of what risk is and what it means to you. Only when you sit back and think about what level of risk you are comfortable with will you be able to reach a happy medium.
The less risk you take the more likely you are to achieve your objectives, but you’ll need to invest more money to get there. Conversely, if you take a higher level of risk you are less likely to achieve your objectives, but you’ll need to invest a lower amount to reach your goals.
In summary, reaching your goals and objectives is driven by getting the balance between the level of risk you are willing to take and the amount of money you have available to invest.

Why You Need A Financial Planner

No one can guarantee you investment success, but a well thought out, sensible investment plan tailored to your unique needs can greatly improve your probability of meeting your future financial goals.

Appointing the right financial planner will give you the freedom and peace of mind to pursue more satisfying activities with loved ones by:

• Creating an overall investment strategy that reduces costs, minimises risk and maximises returns.
• Serving as a partner and guide to make important financial decisions.
• Working with your accountant, lawyer and other professionals to protect your assets and interests.
• Delivering easy to read and understand investment and performance reports.
• Providing you with ongoing investment education.
• Establishing open communication and access to personal and objective advice.
• Helping you to become financially well-organised.
• Consolidating your financial arrangements to simplify your life.

How To Pay Your Planner

Commission-based advisors such as banks, insurance companies, investment managers, stockbrokers and the vast majority of financial advisors are not equipped to assist people with investing. The commission-based pay structure of the industry sets up a conflict of interest. It could be argued that the traditional model of commission based compensation invites advisor abuse, with their clients as their victims.

What good is advice, if it’s not objective? Unlike stockbrokers who have every incentive to maximise commissions and costs, a fee based financial planner will have strong incentives to minimise your costs and maximise your account value.

The result is that you have a service that is more proactive, more holistic in terms of the areas covered and more comprehensive in terms of the level of advice that is being given. It will only work however if you have complete trust and faith of the impartiality of the advice and service being given. It will not work if the adviser has to sell you something to get paid nor will it work if what you buy determines the amount the adviser earns.

A commission based service places both the client and the adviser in the vulnerable position where one of them will nearly always be compromised. The only way to ensure the impartiality of the advice and the service is to make it fee based.

Summary

Hopefully, this has given you a brief insight into the importance of planning your finances with your two ‘hats’ on. Your business activities can be driven by a specific plan to inform your personal life, which must surely come first. It is then how you use your business to enable your personal aspirations to be met.

My advice to you would be to ensure that your advisers have the ability, facilities and commitment to your care to apply this degree of analysis. If done correctly, you should not find yourself out of your depth. Neither should you find yourself walking away from opportunities that would be reasonable for you to seize.

The above information should be considered for guidance only to improve awareness and is not intended as, nor should it be taken as, specific advice. The points mentioned are only summaries of what are complex areas, therefore before taking any action you should seek advice from a professional adviser.

The author Simon Fitton, is a director and certified financial planner with Baxter Fensham Ltd, www.baxterfensham.com

Baxter Fensham Limited is authorised and regulated by the Financial Services Authority The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK.