Tue | Oct 19, 2021
ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER

Oran Hall | Devote time to financial planning

Published:Sunday | July 11, 2021 | 12:08 AM

Financial planning is becoming increasingly important because of the fast-changing nature of the environment in which we live and must operate.

People are living longer. Employers are changing their approach to the provision of retirement benefits for their employees. Financial products are becoming more complex. Regulatory changes are affecting how business is conducted.

As new life and general insurance products are developed, it is necessary to have some basic knowledge of insurance to be able to relate better to those who offer the products and services and to select what is best suited to the needs of the consumer.

As people see their wealth grow and acquire more complex assets, as family relationships become more complex, and as laws change to reflect current situations, having some basic knowledge of estate planning and the tools it employs is becoming increasingly important.

As life expectancy increases, the post-working years increase, thus making it necessary to have a larger pool of funds to provide for a reasonable standard of living during those years while contending with the erosive power of inflation on income. The good news is that we are gaining a greater level of control over inflation.

At the same time, the onus for providing retirement income is moving from employers to employees. This is evident in the shift from defined benefit plans to defined contribution pension plans.

Consequently, pensioners are not able to expect a guaranteed pension as before as the benefits from defined contribution plans are determined by the value of the contributions to the fund and the interest earned on them as opposed to a pension the employer undertakes to pay based on the employee’s years of pensionable service and pensionable salary.

While this makes it imperative for employees to contribute the maximum sum legally allowed to their pension plan, it also makes it necessary to have additional funds for retirement in the event that the investment performance of the pension fund reduces its ability to provide a satisfactory pension.

Contributors to defined benefit plans should also contribute the maximum allowed and build up additional funds for retirement.

To have additional funds, prospective pensioners need to be able to invest their money themselves or to equip themselves to engage intelligently with those to whom they entrust the management of their pension savings.

This has to be done in a market that is becoming more sophisticated at a fast pace. This is reflected in the wide range of financial instruments with new features and higher risk, changing trading and settlement arrangements and the development of different types of markets locally and abroad.

Although the growth of instruments and the increase in their features have increased the options available to individuals, the complexity of some products has contributed to some problems such as the global financial crisis of 2007-2008.

With the increasing price of assets, housing for example, there is more pressure to generate the income levels required to acquire such assets. Even young professionals find it challenging to generate the means to readily acquire some assets.

This has implications for parents who see their children as their pension. But there are cases in which provision has to be made for the care of older relatives thus making it necessary to strike a delicate balance between providing for self and providing for those who must be provided for.

The decline in interest rates has made it more challenging for the more risk averse who must either be satisfied with lower returns and the reduced chance of realising some goals or must shift to an investment strategy to which they are not naturally suited.

Job security is not as it used to be thus creating questions about generating a good and reliable stream of employment income. One solution is a shift to individuals creating their own income and the uncertainty that comes with it although some people are doing so quite profitably.

Regulatory changes have made significant changes to how financial transactions are done. For example, the Financial Services Commission has revolutionised the investment market and has added to the level of protection given to the consumer of investment services, but the onus is still on investors to be prudent in their decision-making.

In this faster-paced environment, where clear and realistic goals are paramount, goal-setting and planning skills assume great importance. So, too, financial literacy skills. This does not mean necessarily that everybody must have the most sophisticated skills - even basic financial literacy skills have value.

As individuals have become challenged to chart and manage their financial future, financial companies have emerged to offer the required services, and others have expanded their range of services to respond to the needs of the market, but the onus is still on the consumer to make suitable decisions.

Many have been able to fund their goals successfully through entrepreneurship, for example, without depending on the financial markets.

All good and well, but, ultimately, consumers need to be able to play a serious role in charting and managing their own personal and financial future. Many have successfully done so in a different time without any claim to sophistication, but times are changing.

- Oran A. Hall, author of ‘Understanding Investments’ and principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel.finviser.jm@gmail.com