‘Failing to plan is planning to fail’, is a quote attributed to Sir Winston Churchill or President Roosevelt depending upon your side of the pond. The point remains that planning is critical, especially in challenging times like the Second World War or even now in post-2008 Bermuda. The economy is fragile and managing cash flow is difficult for most. Many people seek out financial advisers to help guide them to a safe landing. The question is how valuable is that advice.

Morningstar has released a new gauge of the actual economic benefits from personal financial advice. Called ‘Gamma’, the measure calculates the change in the overall net worth of the individual who receives proper financial advisement. Net worth is based on total assets less any indebtedness, which is your personal equity. Gamma is the improvement in personal equity that is built over one’s life work. Overall personal equity or net worth is 30 percent higher for those who receive professional guidance over time according to Morningstar statistics.

Morningstar research executives David Blanchett and Paul Kaplan listed the five components of Gamma at their annual Investment Conference. In order of importance these are: total wealth allocation (not just investments), asset taxation and withdrawal order, dynamic withdrawal policy, utilisation of an annuity, and matching investment strategies to meet future liabilities. Gamma is comparable to the investment statistic Alpha, which measures the value added by investment managers in managing a portfolio of investments. Gamma is broader.

Regulators in the UK perceived “severe failings in the model” of delivery of financial advice. There had been concern about unsavory sales tactics and misrepresentation of the investment products, similar to what occurs in the offshore UK products. This prompted the launch of the Retail Distribution Review or RDR in 2006. As a result, the UK enacted regulations to restructure the financial advisement industry which became effective in 2013.

1. Raising professional standards “Retail investment advice is seen as a profession on a par with others.” Minimum QCF Level 4 (first year university level) qualification, plus ongoing education.

2. Improving clarity Independent advice “Equipped to give comprehensive and fair analysis of their relevant markets ... provide unbiased, unrestricted advice.” Restricted advice, Simplified advice, or Non-advised sales (e.g. execution only).

3. Removing commission bias “Address the potential for adviser remuneration to distort consumer outcomes”. Fee rates disclosed at the start of the advice process; fees paid by invoice, from a platform or from the investment by the provider.

Most of the reforms fell into three main categories: labelling of services, remuneration received, and professional qualifications. During the period leading up to the implementation on January 2013 there was a 20 percent decline in advisers practising in the UK. The RDR has resulted in an outright ban on commission in this market in favour of a separate, transparent and “adviser charge” that delineates the cost of advice from the cost of the investment.

A 2011 US study by Cerulli Research, a Boston Research firm, showed that 31 percent of investors thought financial planning services were free and one-third didn’t know how they paid for advice. Most investors preferred to pay hidden commissions instead of account fees, according to the Cerulli study. In addition, many investors do not know what it means for an adviser to be a fiduciary, which somebody who acts in a client’s best interests. This fact is disconcerting.

The widespread misuse of the ‘financial adviser or planner’ titles for hard-core sales is a growing concerning globally. The UK RDR model has been picked up in Australia, New Zealand with Canada currently drafting legislation. This has forced a meaningful conversation about “what constitutes value for clients”. Vanguard Asset Management sponsored an Adviser Impact study with input from 1,163 consumers across the United Kingdom in May, 2013. Forty-one (41 percent) reported high value from the advisory engagement; they were more in control of their finances. A 2011 Ameriprise study “Good Advice, Good Outcomes’ noted planning clients they were on-track meeting their financial goals, better prepared for the unexpected, and more financially secure/less distressed.

Planning is a Lifelong Activity. The starting point is defining life goals. Cash flow management builds the structure to support those goals. The ongoing planning guidance helps to stop self-defeating behaviour around money. The aim is to create a level lifestyle over a lifetime. The end game is not to overspend or over-save. Planning is NOT just about saving. Individuals need to manage the varied aspects of financial life, to grow wealth not just investments.

Due to the increasing complexity of personal finances, there was a recognised need for unbiased professional guidance. Starting in 1969 as The Society for Financial Counselling Ethics, the first Certified Financial Planning designation was granted in 1972. The Financial Planning Association (FPA) provides ongoing support for the professionals in the industry. By 2005 nearly 100,000 individuals in 18 countries hold the CFP and the FPA is engaging more professionals internationally. The FPA Global Committee with representatives from Australia, Brazil, Bulgaria, Canada, Germany, India, Malaysia, the Netherlands, the US.

The credo of the CFP is to put the client’s best interests first. Act with due care and in utmost good faith. Do not mislead clients. Provide full and fair disclosure of all material facts. Disclose and manage all material conflicts of interest. The FPA has an annual conference to highlight the advances in the field and provide practice management expertise. This is a valuable resource for planning professionals and will increase the value proposition for those needing financial planning advise. The 2014 conference will be held in Seattle from September 20 to 22.

More information is available at http://fpa-be.org.

Patrice Horner is the chairwoman of the Global Advisory Council of the Financial Planning Association (FPA). She holds an MBA in Finance, a FINRA Series 7 Licence, and a Certified Financial Planner (CFP-US) and writes on issues concerning the financial planning industry and profession. Information for the article is drawn from a recent presentation at the Hamilton Rotary Club.