Financial advice. What it looks like and how it can affect you

Financial advice. What it looks like and how it can affect you

 

When it comes to financial advice, and sales in general, there are typically five approaches that sales people take.

  1. Ideal world
  2. Client budget
  3. Average first
  4. Replace with cheaper
  5. Next step

We are firmly an ideal world advisory firm, as we like to consider ourselves advisers, rather than just sales people. 

Sales people sell stuff; we collaboratively weave you a risk protection plan that is driven by your desired outcomes.

However, we get ahead of ourselves let's look at the pros and cons of each approach.

Next step:

Often this fits in with replace with cheaper and is focused on the next best step in implementing your risk management. Often this is about taking what you have already, getting the cheapest option and adding something to it, maybe Medical Cover or Income Protection. 

In some ways, this is our approach, once we have worked through your ideal world and it is now review time, and there were compromises and shortfalls from your original implementation.

The downside is if you did not get here from an ideal world plan you are at risk of not knowing what you do not know to make the best decision about what's next. You have to rely heavily on trusting your adviser, and often this is where the sales pitch comes in, rather than advice.

Replace with cheaper:

This is where the 'advice' is really a transaction. The benefits you have are replaced with 'cheaper' products. Sometimes we have good products that are cheaper; it is always a race to the bottom. The more premium you reduce and less coverage and exclusions you open yourself up to.

This may feel like advice but is really only a comparison of the market and doesn't always take into account all of your personal needs. 

The risk here is while the cover you have is cheaper the cover may not be appropriate for your personal needs.

This is an approach we try to stay away from; some clients want this to start with to get a feel for what we have on offer. Once we discuss it further, the conversation often moves to ideal world and a very different implementation of cover from how it has been approached in the past.

Average first: 

This one is an interesting one, it approaches all clients with a herd approach and is purely sales. By taking the average, it does not take into account your finer needs, and the solution is like an off the rack suit, designed for the average but doesn't really fit that well.

This is an approach to psychologically get you to buy into the herd approach. People in your age/situation/family group typically by X,Y & Z. 

This cookie cutter approach is efficient on the sales and advice side, but probably won't cover your needs well.

Yes, I know people will currently take between $600,000 and $1.1 Million of life cover and between $90,000 and $140,000 of Trauma. They will also cover their mortgage payments, and the higher earner will cover their income, and maybe they add medical insurance in some form.

However, your income may be higher, or lower, than the average. Your debt level could be well managed or quite extreme. Completely different to your circumstances.

The averages indicated above come about from many discussions on the ideal world and informed decisions from clients. They do not come about from an average approach, that just reinforces the average without a basis of fact. 

Which brings us to client budget:

This is where a discussion on budget at the outset drives the advice. Pretty much how much are you going to spend on your life cover? Ok here's what that will buy.

It is an adversarial approach where it becomes a battle of wits to convince a client to increase their budget, because it is always lower than the need. 

You have to be very good at sales to really make a difference in changing mindset and getting past the price object to provide education on better risk decisions. 

Frankly, I am not that good at sales, so we do not take this approach. This approach often leaves client in a position of underinsurance and they often don't know they are underinsured.

One client came to me expecting this approach in combination with replacing with cheaper, as that was how they had been approached before.

Their perceived spend of $400 per month was actually $500 per month. Once we worked through ideal world, which was very expensive, they realised that they had massive exposures that had never been explained to them.

Their budget after this discussion became $1,500 per month. Yes, older clients with very good incomes. While this improvement in budget was an excellent result in itself, I was not done.

When I had clarity on their concerns and where they wanted their cover to respond, we talked through the detail of their policy structure to give them the best options and minimise the cover needed. 

That corse $1,500 per month we turned into $920 per month that will deliver on their needs as they see it. Their premiums will get to $1,500 eventually, they are still getting older, but they have space to retain this cover even when the premium increases.

See I am rubbish at sales, I turned a $1,500 premium sale into $920. Still good in many ways, but a sales person would have taken the $1,500 and run. 

We are advisers, focused on the best coverage for as little cover and premium as possible. By advising we get better outcomes. We get better structures, and we make insurance more cost effective for you. This much we can promise.

Which brings me to ideal world:

This is where a detailed picture of your situation is undertaken. This understands the critical aspects of your situation and ensures the most appropriate products and structures are applied. 

This will generate an advice document that is often significantly more cover than you can afford and you will implement.

This approach does not introduce price until the education on the situation, solutions and how stuff works is covered. 

By introducing price early, the barriers to the education come up. They are not helpful to you making an informed decision about your life outcomes and how your financial support will work.

The majority of clients do not know what they do not know when it comes to insurance. What you learned from your parents when there were only 2 or 3 products available is quite different to what we now have.

This education piece is critical. We do not apologise for it; it is essential to you getting what you really need, want and desire.

What we do find is when clients have an educated review of their risks their more informed position results in higher budgets allocated to risk management. 

Hang on that is sales. Yes to a point. More the point we know that the average New Zealander is underinsured. This underinsurance comes from two places. Lack of budget for the need and lack of education to realistically set the budget.

If we have an underinsurance problem and you are buying an average package, you are, by the very nature of averages, going to be underinsured. Without knowing you are and where you have exposure.

If you want to have a frank, cost effective discussion about your risk management, book some time with one of our advisers and get a real picture of your needs. What your budget should look like and make some decisions about the reality of your budget when focused on the coverage you feel you really need.

Husbands often don't believe in life insurance, but widows do.

Jon-Paul Hale

Written by : Jon-Paul Hale

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Physical Address:
5i Miro Place
Albany
Auckland

Email: enquiry@willowgrove.co.nz
Phone: 09 973 2849

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