I sometimes despair. This market has been conditioned, sometimes brainwashed, or should I say, well taught, over decades to think that financial planning has anything to do with FCA-regulated activities.
It is a lie.
This month I have heard it said from industry experts whose opinions I admire and respect that they believe financial planning is sailing close to crossing the line to regulated activity. And that financial planners might accidentally stray into regulated activity. They couldn’t be further from the truth.
So here I go again, banging my head against the proverbial brick wall.
My friends. You have fallen for the lie. What you consider as financial planning, isn’t financial planning. It is an activity product salespeople have labelled as financial planning to give them a modicum of respect and a disguise for what they are really doing, which is product selling.
Let me explain why and then you decide.
Let’s start with some facts.
According to the Office for National Statistics Wealth and Assets Survey, investments form less than five per cent of personal wealth. And regulated investments are a subset of this category. Investments sit within the definition of Financial Assets, and when you add cash savings to investments, this category makes up thirteen per cent of total personal wealth. And that excludes business assets. So, the actual percentage is even smaller.
As any accountant will tell you, tangible assets are a subset of a wider group of total assets. The difference is intangible assets (such as brands, goodwill, patents, copyrights, trademarks, trade names, software, people, connections, skill, location, know-how, intellectual property, etc.).
A physical asset is an economic, commercial, or exchange value with a material existence. Physical assets are also known as tangible assets. For most businesses, physical assets usually refer to properties, equipment, and inventory.
Intangible assets are non-monetary assets without physical substance. Like most assets, intangible assets are expected to generate future economic returns for the owner.
For some brands, the valuations attached to intangible assets far exceed the valuation placed on physical assets.
The Market-to-Book Ratio (also called the Price-to-Book Ratio – PB ratio) is a financial valuation metric used to evaluate a company’s current market value relative to its book value. The market value is the current stock price of all outstanding shares (i.e., the market believes the company is worth). The book value is the amount left if the company liquidates all of its assets and repays all of its liabilities.
The book value equals the company’s net assets and comes from the balance sheet. In other words, the ratio is used to compare a business’s available net assets with its stock’s sales price.
PB ratios vary from company to company. The book value used in the calculation will not include the intangible assets of companies; thus P/B ratio of some companies seems to be higher than what it should be. Technology companies such as Microsoft (10.32), Tesla (28.94), and Apple (44.73) are a few examples.
On the other hand, the P/B ratio can be an indispensable tool for evaluating a capital-intensive business. These businesses have a high level of tangible assets. Financial sectors such as Banks (1.56) are one such example.
Here’s the thing. What’s your PB ratio?
Your biggest asset could be your intangibles. You are a Tesla or an Apple. Or more. Your market value could be 50 or 100 times your book value. The potential within you can be leveraged through an entrepreneurial opportunity to create a sustainable livelihood that generates economic returns for you over the future.
According to the United Nations, knowing this can end world poverty.
“Priority actions on poverty eradication include improving access to sustainable livelihoods, entrepreneurial opportunities and productive resources.”
If your PB value is 50, and your regulated investments are 5% of your physical assets, then regulated investments comprise £1 in £1,000 of your worth.
There are two more essential asset classes that I have yet to add to your intangible asset mix. Vitality assets and transformational assets. So far, we have only considered productive assets with future economic value to the owner.
Vitality assets are essential for determining the “lifetime” in my lifetime cash flow forecast. Are we planning for three years or 30 years?
Shrouds have no pockets!
I recommend Sir Muir Gray’s Living Longer Better training to extend your healthy life. Use my code LIFEPLAN20 for a 20% discount.
Transformational assets are like your risk tolerance questionnaire. Investing to increase your holdings here reduces the risk to your economic plan.
Suppose you would like a FREE audit of your personal asset inventory broken down by asset class, a Factfind. In that case, an instant Diagnostic Survey report delivered to your inbox is available from London Business School professors Lynda Gratton and Andrew J. Scott.
How significant are those regulated investments in my financial plan so far?
Next, we need a liability forecast. Here we need to consider your favourite future and put a price tag on it, year by year, for the cash flow forecast.
I need to ask what is important to you, your values. I need to ask what your gifts are (from your diagnostic report). Your gifts are what God has bestowed upon you; your purpose in life is to use those gifts to follow God’s Will. In other words, to serve others. I want my clients to live a values-driven and purpose-driven life.
To what you are GOOD AT, I look at WHAT YOU LOVE, THE WORLD NEEDS, AND WILL PAY FOR. Your Ikigai. Now I understand the liability profile and the strategy to optimise economic returns on your productive assets for minimum risk to put in place the financial architecture to support your favourite future. It helps you to live longer better.
The result I call your Game Plan for life.
Now, where was I? Yes, those pesky regulated investments.
I couldn’t give two hoots about what you do with them. They make no difference to the Game Plan.
I refer to the former CEO of the FCA, Christopher Woolard, who commented on the retail investment market in the consultation leading up to consumer duty regulations.
“The overwhelming majority of retail investors are best served by readily understood, well-diversified and low-cost investments which are already available from a range of providers, but many retail investors don’t choose these.”
For me, this is an acknowledgement that the investment market is commoditised. I suggest my clients spend £1 per week on a Which Money subscription, which tells them which provider to choose. Before you ask, directing a client to an independent, publicly available survey is not a regulated activity. If a client has a problem with that, they can always see a regulated investment adviser and give them a quarter of their safe drawdown rate of four per cent per annum for coffee and chocolate cake.
Whether my client pays a vertically integrated firm two per cent or a D2C platform half a per cent has no visible impact on my Game Plan.
Now that I’ve told you what financial planning is, and what it is not, I want to thank you for listening.
First, they listen, then they understand, and then they believe.
Regulated activity has little to do with financial planning.
What regulated investment salespeople do before selling an investment to me is the equivalent of moving deckchairs around on a sinking ship. It is far from financial planning.
There is a whole ocean between financial planning and FCA-regulated activity.
And proper financial planning only becomes a regulated activity if it is given in the course of or in preparation for a regulated activity. Then it can form part of that regulated activity. PERG 8.26.5.
So friends, please stop insulting me and talking to me as if I’m some sort of criminal!
I’m an advice-only financial planner, and the Competition and Markets Authority regulate me.
Academy of Life Planning 