This is an update of an article about holistic financial planning that I wrote for International Adviser exactly 4 years ago. There have been a lot of changes since, pension rules both within and outside of the UK, whilst IDD (IMD II) and MiFID II are all but with us. Defined Benefit pension transfer activity has raised the eyebrows of the FCA and it would seem that the concerns are based on an actual lack of holistic financial planning.
In other words, some advisers have not taken account of the actual costs of the product, including proposed investments and, it would seem, the overall financial planning of the client and risk status – leading to numerous firms having to suspend their transfer advice pending reviews (interestingly quite a few are actually connected with established overseas firms rather than established UK firms, and you can read into that what you want).
This led me to think it would be a good time to revisit my old article.
What is Holistic Financial Planning?
Parallels can be observed in the world of financial advice-giving. Take “holistic financial planning”, for example.
Consider the definition of “holistic” – as in holistic theory – which holds that the parts of any whole cannot exist and cannot be understood except in their relation to the whole. “Holism”, in other words, holds that the whole “is greater than the sum of its parts”.
Put in financial planning terms, a financial plan that does not take into account all of a client’s needs could have unforeseen and unfortunate consequences – thus the popularity of holistic financial planning as a concept.
The number of situations in which a lack of care, and/or knowledge, can impact on other areas of financial planning – and knock a holistic plan onto its ear – are too numerous to mention.
Some common examples that I have come across include:
- Selling a life policy without using a trust, and causing an increase in the potential inheritance tax (IHT) of the client’s estate
- The cashing-in of a share portfolio of someone who is retired, and thus triggering significant capital gains tax (CGT). Upon death the remaining funds are subjected to IHT – but the CGT would not have been payable on death, had the portfolio not been encashed
- Selling a personalised bond to a returning UK expat, and in doing so creating a chargeable gain of 15% pa, which starts to accrue from the date the expat becomes a UK resident again, even if the policy makes no money
- Transferring a pension offshore to obtain a greater lump sum when , in fact, the existing pension had “scheme-specific lump sum protection”
- Establishing a trust for a ‘life tenant’ – that is, someone who has a right to income but not to the capital that produces it (unless expressly given in the trust deed) – and using a non-income producing asset from which capital withdrawals are made to do so. This leaves the trustees at risk of possible action by the ‘remaindermen’, the ultimate beneficiaries, who could take action against the trustees if the life tenant used up “their” capital by taking the capital instead of the income
- Not understanding the most tax effective way for a client to cash in his or her investment bonds, and thus triggering a chargeable event that cannot be undone
- And the latest, a UK pension transfer specialist facilitating the transfer of a final salary scheme, with little idea how it will be invested, the overall circumstances of the client and in flagrant disregard for Outcome (Link) of Treating Customers Fairly as the non-UK client then can end up in products with high exit fees.
One need not look very far to find financial websites that feature advisers who claim to be “fully qualified” or “experts”. Such websites invariably beg the question (or should): How can one person be fully qualified to deal with all things financial? Are there really people out there with the expertise to provide full holistic financial advice to anyone who walks through their door?
At what point should a financial planner put up his/her hand and say, “I’m sorry, Mr Jones, but I will need to refer to a specialist in order to provide you with the best solution”?
A case in point
The case of Mehjoo v Harben Barker (June 2013), demonstrates well the problems that can arise from having only a limited expertise in a particular area – and the obligations that come with that limitation.
In summing up, the judge in that case, which was decided in June in the UK High Court in London – stated that the defendants had a contractual duty to advise their claimant that non domicile status carried with it potentially significant tax advantages.
The judge likened this duty to refer a client to a tax specialist to a GP’s duty to refer a patient to a specialist in the field of medicine indicated by the patient’s particular illness. The idea being, of course, that if a professional is aware that there might be certain types of treatment known only to specialists in that field, then he or she has an obligation to say so.
When this case (Mehjoo v Harben) was reported on an accountancy journal’s website, one commentator stated that there is nothing wrong with being out of your depth, as nobody can be au fait with every aspect of finance.
He then went on to point out that there is something very wrong with failing to recognise when one is out of one’s depth, and cheerfully providing advice that is inadequate – particularly when the consequence is that the client suffers as a result.
Involving other parties in a problem does not just relate to financial planning, as the example of the GP used by the judge illustrates. The efficiencies of synergy have been recognised in business for many years.
In his 1965 book, Corporate Strategy, H. Igor Ansoff, the mathematician and business manager who is sometimes referred to as “the father of strategic management”, defined synergy as “2+2=5”. That is, he explained, that the whole is greater than the mere sum of its parts.
The same principles apply to the components of the “expert”. Put another way, the assimilation of specialists in various fields can provide a better solution than that that would have been achieved by working independently.
In many cases the outside “expert” may be include a financial adviser, a lawyer, an accountant, an actuary, a visa consultant, or an independent fund manager. Clearly, giving clients access to such advice also gives the adviser opportunities to forge new professional relationships that will not only benefit the clients, but also the IFA business itself.
Holistic Financial Planning- recognised qualifications
Some of the professional institutes, involved in training and setting professional exams, understand the importance of a holistic approach to financial planning. The Institute of Financial Planning (Now the CISI), for example, requires its students to complete a holistic case study if they wish to progress to becoming a Certified Financial Planner. The Chartered Insurance Institute requires those who wish to progress to Associate or Chartered level to complete a similar paper, AF5 (previously known as H25 Holistic Financial Planning).
While such exams provide a grounding for a holistic approach to financial planning, there will always be occasions when these students’ future clients will present with unfamiliar personal needs or situations, and under ideal circumstances, will be referred for specialist advice.
Surely one of the secrets to good holistic financial planning, then, somewhat ironically, is to know – and not be afraid to say – what you don’t know.
No one, after all, wants to be the solitary sunbather on a Texas beach, after the locals – well familiar with the tsunami warning signs coming up from the Gulf of Mexico – had long since headed for higher ground.
This article demonstrates why expats seeking financial advice need to –
- Check the qualifications of the adviser . If they are offering full holistic advice they really need to be Chartered or Certified Financial Planners as both will have qualifications for holistic financial planning.
- Agree that any advice will have transparent and agreed fees
- Make sure the adviser is happy to work with your other professional advisers such as lawyers and accountants.
This article was published on 2nd August 2017
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