Since establishing Pilot I've become used to explaining the difference between genuine, professional Financial Planning and other forms of financial or investment advice. It's essential to ensure that a new client relationship is on the right footing from the outset; after all, it's hardly our clients' fault that the term 'Financial Planning' has no separate regulatory status and in many cases has been hijacked by firms whose core business is not actually Financial Planning.
In order not to appear defensive, or critical of competitors, I typically use open questions to ascertain what a client is expecting our service to deliver and to discover what concerns or preconceptions they may have about financial advisers in general.
In Piers and Sophie's case, their previous experiences with financial services companies had been universally poor. Piers had spent a brief, unenjoyable period working at an American investment bank.
Both had also been poorly advised several years ago by Sophie's parents' IFA and, more recently, they had been sold keyman insurance by their company's bank. They also explained that their company's accountant had consistently advised them against investing through pensions, believing them to be poor value for money. None of the advice they had received was joined-up; they were confused and uncertain of who they should trust. Their overriding impression was of an industry where financial advice was conflated with the sale of financial products and which was riven with conflicts of interest. They may not have known exactly what they were looking for from me, but this most definitely was not it.
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I spent some time explaining the two alternative business models that financial advice firms can
adopt: Sales or Fiduciary (not independent or restricted). I also described the stages of our advice process and what could be expected at each, together with the expected cost This, together with the reference we had received from their newly appointed director, seemed to put them at ease and the barriers started to come down. I also immediately warmed to them and could envisage a long-term, mutually beneficial partnership developing. We quickly found ourselves agreeing to work together and to formulate their first financial plan.
My first task was of course to gain a comprehensive understanding of Piers and Sophie's personal circumstances and financial position, together with their goals and objectives. As is the case with many small and medium-sized business owners, their own finances were intimately linked with those of their company, so although I was advising them in a personal capacity it was also important to gain an insight into the financial position and prospects of the firm.
The business, Fair Trade Homeware, having started out on their kitchen table, was now making huge strides, with a turnover of several million and a net profit of several hundred thousand pounds in the previous financial year. It was growing at 20-30 per cent compound each year and cashflow was well-managed. Despite this, with capital required to invest in logistics software, warehousing and other infrastructure, as well as new export markets, a significant proportion of profits were to be retained in the business. Piers and Sophie were drawing a small salary, with the majority of their income being paid in the form of dividends. In total, their income was more than sufficient to support their current lifestyle.
Other than their business, main residence, cars and personal possessions, their only other assets were two unit trusts, valued at around £30,000 in total, into which they were saving £1,000 per month. Both also had a joint-life level term life assurance and critical illness policy, taken out in conjunction with their interest-only mortgage.
Both Piers and Sophie had clearly spent some time individually considering their future plans, however our meeting was the first time they had found time and space to share their thoughts in any detail. I took considerable care in helping them articulate their hopes, dreams and aspirations, then qualifying these, in terms of timescales, costs and priorities.
The list of goals included a desire to spend more time on adventure holidays with their children. In the longer term they were also keen to combine longer periods of travel with charitable work.
This would become possible after the sale of their business, which they were aiming to achieve in approximately ten years' time. At this point they would be financially independent, but were already starting to discuss future potential business ventures, rather than retirement. More pragmatically, they were both keen to educate their children privately and to move into a larger property within the next five years.
Based on the hard and soft data I had collected, we then constructed a lifetime cashflow forecast. In this case, it was essential to develop several alternative 'what if' scenarios. Should Fair Trade Homeware continue to grow successfully and be sold for the anticipated sum, at the expected time, there would be little value in additional Financial Planning at this point.
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On the other hand, should anything happen to affect the success of the business, or its eventual sale, there was clearly no 'Plan B'.At our next 'Strategy' meeting, I presented my findings in the form of visually appealing, and easily understood, charts. This process, as usual, had a profound impact on the clients. Both Piers and Sophie engaged enthusiastically with the scenario planning exercise and together we refined their objectives and priorities.
When presented with all the facts and a clear vision of their alternative financial futures, Sophie in particular became very keen to contribute a sizeable proportion of the company's profits to pensions, as a tax-efficient way to extract profits and, more importantly, as a risk mitigation strategy, should the company not continue to be a success. We discussed an appropriate sum that could be contributed each month to a Sipp in each of their names, without constraining the growth potential of Fair Trade Homeware. Piers and Sophie agreed that £7,000 per month would be easily manageable for the business, and I explained that one-off contributions could be added, using the carry forward rules if necessary, should profitability support it.
Looking at their other objectives, it was important that sufficient funds were available, at the appropriate time, in their own names. We discussed alternative investment strategies in order to validate the independent risk tolerance measurements we had already obtained, as well as the affordability of any further personal savings.
Finally, we considered their financial protection arrangements and, again using cashflow analysis, discussed the impact on their plans, should the worst happen. It became apparent that there was a protection shortfall, particularly if Piers were to die.
In this case, Sophie would want to sell the business as soon as possible, which would significantly reduce the anticipated sale proceeds, as well as remove her only source of income. If Sophie were to die, on the other hand, Piers would continue to run the company, but would still require a smaller amount of additional insurance cover.
On re-running our cashflow analysis I could demonstrate that, using reasonable assumptions, their financial future could be secured, affordably, and independently of the sale of Fair Trade Homeware, within as little as 10 to 15 years.
Shortly afterwards we met again and I presented my detailed recommendations. We would use a platform solution for both the company pension contributions and Piers and Sophie's personal savings. In future, these were to be increased slightly and invested via a more tax-efficient Isa wrapper, with the existing unit trusts also being re- registered to the same platform.
We recommended a diversified blend of funds, for all of the investment-related products. This took into account both Piers and Sophie's attitudes to investment risk, as well as their risk capacity and the required rate of investment return; the latter two factors having been informed by our cashflow modelling exercise. More specifically, we constructed two different portfolios, to meet the medium and longer-term goals.
After assessing the potential Capital Gains Tax liability, and once the existing unit trusts were held on the chosen platform, we recommended that these too were switched into our more appropriate investment portfolio, utilising the remaining available Isa allowance in the current year. Looking forward, we also recommended a regular investment review and rebalancing exercise, which we anticipated would also gradually move all the unwrapped fund holdings into their Isa wrapper; both processes would be highly efficient due to the use of our recommended investment platform.
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I also suggested family income benefit policies as a relatively cheap way of addressing their protection shortfalls. These were to be placed into discretionary trusts, together with their existing protection policies, which had been originally set up with apparently little consideration for potential probate or inheritance tax issues. Given the time we had spent on agreeing the overall strategy, my detailed recommendations were quickly accepted. We completed the paperwork and I remained in close contact with our new clients as the various products and trusts were established, ensuring that they remained comfortable with, and connected to, the process.

What happened next?
Both Piers and Sophie were delighted with the advice they had received and the Financial Planning process that had preceded it. They wrote a glowing review, which we still use in some of our marketing literature and have gone out of their way to recommend us.
At our first review meeting they reiterated how much more in control of their personal finances they now felt and how reassured they were to have a trusted source of ongoing advice. They subsequently admitted that the binary risk of using their business as their main source of retirement funding was something that had been troubling both of them and yet neither of them had been able to articulate this properly to each other until they engaged our services.
As will always be the case, the initial financial plan and its associated investment strategy has been gradually evolving since our initial advice, but Fair Trade Homeware continues to grow and Piers and Sophie remain on track to achieve all their goals in life.