Baby steps
Client's will sometimes need more than just sound financial advice to help them manage their financial affairs; it often comes down to reminding them that taking care of their short-term goals is the route to releasing their long-term aims
In previous articles I've drawn attention to the growing body of academic research that sheds light on the way we have evolved to make decisions. Specifically, I have highlighted various examples of the typical financial decisions that most of us have to make throughout the course of our lives, and I've sought to better understand the completely natural tendencies which affect those decisions, and how they often work against our longer term interests, despite our most earnest attempts at rationality and forethought.
It is perhaps no surprise that our tendency to rely on gut instinct is at its most potent when we feel threatened or insecure. What is surprising, I think, is how apparently straightforward rational financial considerations ignite heightened emotional responses within us, triggering physiological reactions that can quickly and decisively render clear thought impossible. But how can we approach this practically and provide better outcomes for our clients?
As advisers, our work very often brings us close to people at a time of great upheaval - a family bereavement, divorce, redundancy and even retirement. At a time of change it is often the case that our logical and emotional capacities are being stretched beyond their typical limits, as we seek to assimilate new information about our environment. This is stressful even if the cause is (at least on the surface) a positive one. By way of example, the most stressed individual I have ever met at an initial meeting was the winner of a seven figure lottery prize. A task that the majority of us would covet - how to start enjoying a lottery win - was one of the worst experiences of this individual's life.
His friends and family were pushing him to celebrate and enjoy himself, but he was overawed by the responsibility of not frittering the money away. His ability to process information and act decisively was smothered by his inability to comprehend the fundamentally new environment that he felt he would now have to navigate. In his fifties and with moderate income throughout his life, he'd never previously had to think about tax reporting, portfolio management, or estate planning. Now his life would be dominated by such considerations - at least that's how I understood he perceived the matter when I first met him. Once we returned his focus to his longer term lifestyle objectives, his values and unshakeable principles, it was much easier for him to make short term decisions, and this is the theme I want to look at in more detail.
There is no reason why living for today and planning for tomorrow should be mutually exclusive. No matter how stressful your client's situation, they will benefit immensely from keeping the longer-term big picture in mind.
Financial planning will help client's deal with the conflict between their present needs and wants, and their future needs and wants, by providing a meaningful framework to every decision they take. I often think of a Financial Plan as the best possible advocate for my client's 'future self', who is of course the first person to suffer when their 'present self' behaves without forethought.
A significant first step is to set realistic short, medium and long term goals in non-financial terms (I want a diversified portfolio does not count) and to get your client to explicitly take ownership of them. I do this by asking the client to write them out in their own hand, or to sign a summary that I produce, and of which we each retain a copy. Taking your time over this task and being as detailed as possible will make the rest of your work much easier. Getting your client to think and discuss different areas of their life (family, friendships, career, travel, health, creativity, volunteering) will get the conversation started.
Next, you need to support them by getting them organized. They need to understand what their assets and liabilities are, as well as how they are likely to evolve over time. Just because this is water off a duck's back for you, never overlook the value that client's derive from a summary of their net worth. Collect all statements and correspondence from bank accounts, investments, pensions, insurance and credit cards. Help them file the important information (shoe boxes and Tesco's bags do not count as files) and shred the marketing gumpf.
Only once you've done this groundwork can they start to make sense of their financial life and order it so that it supports the achievement of their most cherished life goals, rather than providing just another layer of complexity and stress in their lives.
Nothing should distract them from achieving the life they want, and we as a profession should not overlook the simple steps that provide real benefits.
Steven Hennessy is a chartered financial planner and associate director at Myers Davison Ginger
He writes a regular blog about behavioural finance for Private Client Adviser