
According to the Financial Advice Association of Australia (FAAA), the financial planning process involves the following steps:
- identifying the client’s financial goals;
- assessing their financial situation
- preparing a financial plan
- implementing the recommendations; and
- reviewing the plan regularly.
Similar obligations are embedded in Section 961B of the Corporations Act which requires advisers to identify the ‘objectives, financial situation and needs of the client.’ The process seems simple enough: just figure out what the client wants, consider their circumstances, and deliver advice to meet their objectives.
But is it really so straightforward?
Consider Lois and Clark who are about to retire from their jobs in the print media industry. They have a combined superannuation balance of $1 million and have a retirement income goal of $60,000 per annum. Their financial adviser recommends putting 50% into a high dividend share fund and 50% into government bonds. The adviser explains that this ‘balanced’ portfolio should generate a total return of about 7% over the medium term and allow them to meet their income target.
Over the next few years, their fund return is very close to the adviser’s estimate although they both worry about daily fluctuations in the unit prices.
Lois then receives an unexpected inheritance of $1 million and contributes the money to super over the following few years. Their combined balance is now $2 million.
Because they can achieve their retirement income goal with just a 3% annual return, the adviser suggests switching into a ‘conservative’ investment option which holds 20% in shares and 80% in government bills and bonds. While capital growth will be minimal, it should comfortably meet their income needs and their account balance should be more stable.
Is this a good outcome?
The adviser has done everything by the book. He has considered their objectives, knows their financial situation and recommended products that should achieve their retirement goal. Moreover, the conservative option appears to be consistent with their risk profile.
The missing piece of the puzzle is the clients’ time horizon.
It is common for advisers to focus on ticking the retirement income box but to gloss over the wider investment story.
Indeed, many advisers rarely or never discuss investment performance – which can be very convenient if their recommended funds are doing poorly. If a client does ask about performance, the issue is often deflected by asserting that no-one can predict market moves so there’s no point chopping and changing.
Advisers can put even more distance between themselves and the client’s investment performance by outsourcing that part of the role to a consultant or advisory board, which many do.

Figure 1 shows the risk of a loss from an Australian share portfolio over various holding periods. For a one-year time horizon, the risk is almost 25% but over six years, the odds of being below your initial investment are close to zero.
How was the goal determined?
While it is possible that Lois and Clark came up with their retirement income goal after carefully reviewing their needs and expenses, that’s not normally the case. Most people don’t know how much money they will need in retirement and generally overestimate what they will require. Their prime focus is usually to spend as little of their nest egg as possible but not live like a Spartan.
But perhaps the biggest danger of nominating a retirement income goal is that it tends to become a floor not a target. As soon as a client specifies a precise number, the adviser’s incentive is to satisfy that objective with the least professional risk (and effort). Why investigate the feasibility of generating an income of $70,000 per year when the client has only asked for $60,000?
Rather than focusing on client-determined goals, the aim should be to set an investment strategy that entails a level of risk that the client is prepared to accept. For example, constructing a portfolio that has a 6% chance of a loss in any given year, or a 15% chance, and so on.
If Lois and Clark were told they could achieve a return of $72,000 per annum with a 9% risk of a loss, they might jump at it.
By keeping an eye on the client’s investment time horizon and adjusting the level of risk as required via asset allocation, it should be possible to achieve better returns without throwing caution to the wind.
Hiving off these decisions to a third party, or using a model portfolio, can make the task of fine-tuning risk levels difficult or impossible. The aim should be to balance risks and returns, not control returns to meet arbitrary income goals.