Making Financial Planning Less Scary For Investors
January 15, 2014 by Mike Spangler
Five years have passed since the financial crisis of 2008, but its consequences continue to play out. Investors who have stayed or jumped back in the markets have an understandably optimistic outlook, since at the end of 2013, the S&P 500 Index and the Dow Jones Industrial Average hit all-time highs and the Nasdaq topped 4,000 for the first time in 13 years. Nevertheless, while the investment community at large no longer harbors misgivings about investing in the stock market, baggage from the crisis of five years ago has led some investors to shut financial advisors out of their financial planning processes — and in some cases, avoid financial planning altogether.
Nationwide Financial’s “Fear of Financial Planning” study found that 26% of investors do not have a financial plan, and 38% of those who have no plan have no intention of mapping one out. Respondents appear to be victims of their own inertia and lack of knowledge. Of those who have no financial plan, 31% said they have not gotten around to creating one, 20% stated they do not require one, 16% answered that they do not know how to make one and 15% said they do not need a tangible financial plan because “all of the information I need is in my head.”
Advisors should keep these statistics in mind when meeting with current and potential clients. Many investors either distrust financial advisors (choosing to lump them in with “Wall Street”) or feel they can receive financial advice and everything they need to know about investing from online sources for free.
In fact, 36% of the Nationwide survey’s respondents said they have either never worked with a financial advisor, or have in the past but are not doing so currently. The most frequently cited reasons investors gave for not working with a financial advisor were: they felt they did not need professional assistance (40%), they did not want to pay the fees associated with advisors (20%), they felt they did not have enough assets to work with an advisor (11%) and they were afraid to trust financial advice from a stranger (6%).
Advisors must take the bull by the horns and educate potential clients about the benefits that come from a deeply established advisor/client relationship. The above-mentioned study results show that many investors, to their detriment, let emotions control their approach to investing and financial planning. It is incumbent upon advisors to make clients know they are objective professionals who provide guidance, services, and insight that investors simply cannot obtain anywhere else.
One way to effectively communicate this point is to demonstrate to clients the key differences between a do-it-yourself approach to financial planning and a detailed financial plan created with the help of an advisor. Investors working without the assistance of a trained financial professional are likely ignoring market averages, risk tolerance, diversification and other variables that advisors take into consideration when helping clients make decisions. Furthermore, investors working independently do not have access to (or awareness of) the wide spectrum of financial products that advisors can provide.
On the other hand, financial advisors evaluate the full depth and breadth of an investor’s life and financial background as well as aspirational goals in order to craft a personalized financial plan covering the short, medium and long terms and incorporating the financial products necessary to achieve set benchmarks in those time frames. Advisors also regularly follow up with their clients to review existing financial plans, monitor progress and make necessary adjustments — a process that brings clients closer to achieving their long-term goals.
These are especially important points to convey to younger investors, particularly those belonging to Generation Y, also known as “millennials.” Along with their counterparts in Generation X, these investors are more likely to consult social media and other online platforms for financial guidance rather than seek out a financial advisor. Millennials are also more likely to distrust the financial services industry because they have never really known a stable market, having come of age along with the bursting of the dot-com and housing bubbles.
Advisors should reassure clients and prospects of all ages that a financial crisis is not the same thing as a normal market cycle, and back up this explanation with historical market data. Advisors can also set investors’ minds at ease by refocusing their goals. For example, younger clients should be reminded that they are a long way from retirement, and taking advantage of dollar-cost averaging and compounding now can help them save for that far-off period of their lives.
Due to their collaborative and detailed nature, financial plans are a good way for investors to reach their financial goals and weather market volatility. By taking the time to talk to clients and prospects about their fears and concerns, advisors can help them overcome those obstacles by creating road maps to a financially secure retirement and placing potential strategies in proper context for investors.
Mike Spangler is President of Nationwide Funds. For more information about Nationwide Financial’s “Fear of Financial Planning” study, please visit http://www.nationwide.com/nf-fear-of-financial-planning.jsp.
Nationwide Funds distributed by Nationwide Fund Distributors LLC (NFD), member FINRA, King of Prussia, Pa.
