Being in vogue these days is passé

It intrigues me that advisers are now talking about ‘life planning’. Possibly naively, I thought that was what financial planning was supposed to be. Or in the current investment climate, do advisers want to re-invent themselves as something other than investment advisers — which many have been portraying themselves as over the last five years?

I thought financial planning was about helping a client to achieve their goals, by putting together a plan and then providing ongoing monitoring to ensure that the plan was continuing to meet their needs.

How is ‘life planning’ any different? Is it different because advisers have not been doing proper financial planning? Have they been only paying lip service to financial planning whilst they presented themselves, either as investment experts, or as retirement strategy experts or even as both?

I want to discuss the above for two reasons. Firstly, because it appears that the term ‘financial planning’ means many different things to many people. Secondly, there have been a number of articles in the press recently that challenge some of the basic tenets of financial planning.

Traditionally, financial planning is defined as a six-step process. As I have argued many times, this is no more than a logical process that should be used to find a solution to any problem. So, all we are saying is that we are going to use a logical process to help our clients put a solution (plan) together to solve their problem (achieve their goals). If the six-step process is not financial planning, what is it? Has it been defined by our regulators or by the current education/ training programs for advisers?

The regulators regulate advisers as product advisers, and advisers are educated in investment principles and technical strategies. This focus on products, the technical stuff and the strategies has positioned the adviser more as a technician than as an adviser. This may be the cause to some of the reasons why we have confusion over what financial planning is and why many clients are questioning the role and value of advisers.

In October, Alan Kohler wrote an article in theAustralian Financial Reviewwhere he, in essence, defined financial planners as equity salesman — whether direct or managed. It is pretty hard to counter his arguments, especially when there is no agreement on what financial planning is (obviously excepting the six-step process definition).

It is worth quoting some of Kohler’s comments. He says: “The investment industry is a creature of the 20-year bull market and as a result, its cash flow is almost entirely derived from peddling company shares.” Further he says: “…and most powerfully of all, an industry called ‘financial planning’ has developed, whose members derive their income largely out of commissions from selling equities ... When a person with $100,000 to invest goes to a planner — whether independent or tied — he or she is entering an equities shop. There will be a range of products for a range of personal tastes on the shelves labeled ‘growth’, ‘balanced growth’, ‘conservative growth’, ‘high growth’, etc.”

Kohler is not strictly correct. There have been periods in the last 20 years where planners (advisers) have pushed unlisted property trusts, mortgage trusts, fixed interest funds, tax effective schemes, property syndicates — do I need to go on? In essence, planners are perceived as product pushers and most likely, products of that asset class that has recently performed best (currently listed property trusts).

Why is this so? One reason could be that, that is what planners are. However, another reason could be, as I have stated earlier, there is confusion over what the role of a planner is — mainly because planners themselves cannot agree.

Is financial planning about investment, technical strategies or is it about the client’s goals? Many probably think they are one and the same thing, but are they? Are the goals purely financial, or is the money just one of the tools that is needed to achieve the goals?

We express the goals as financial, but they are broader than financial — they are about lifestyle, they are about security, peace of mind, even for some about follies. We even try to risk profile clients to ensure they will be comfortable with the investment strategy.

This has assumed that investors (including retail) are rational about money and therefore their aversity to risk can be measured. Surprise, surprise, it appears people (especially investors) are not (I repeat not) rational about money.

This year’s Nobel Prize in economic sciences has gone to Daniel Kahneman and Vernon Smith for their work on behavioural economics. Behavioural economics challenges a basic assumption of the economists’ standard neo-classical model: that economic agents (in this instant, retail investors) make ‘rational’ choices about what to do.

Ross Gittins in theSydney MorningHeraldof 12-13 October this year summarised the differences between the two schools very well. He boiled the insights of behavioural economics down to six key findings. It’s worth quoting extracts from his article on three of the six findings.

Firstly, Gittins says: “… people simply can’t see why they should ignore what economists call ‘sunk costs’ that is losses already incurred. ...(Many investors take the attitude that they don’t want to crystallise losses — they will keep them until they recover their price.) Economists say this is irrational thinking ... The past is irrelevant, all that matters is the future. But behavioural economists have convincingly demonstrated that retail investors rarely ignore sunk costs.”

Secondly, Gittins says: “ ...people are more interested about thechangein their wealth than about its ultimate level. Say I offer you the choice between starting the day with $150 and suffering a loss of $50 or starting and ending the day with $100. Conventional theory predicts that you’ll be indifferent between the two but, in fact, most people would prefer to avoid the loss by starting and ending with $100.”

The third, and most interesting finding relates to aversity to risk. Gittins says: “...people aren’t so much ‘risk averse’ — as the economists assume — as ‘loss averse’. It’s true that people are averse to taking risks when it comes to making gains, but their dislike of incurring losses is so great that many are not willing to take gambles in the hope of avoiding them.”

What the above is telling me is that planning is more than the equity markets, it is more than economics — I could even say it’s not about either of them at all.

Planning is about helping clients achieve their goals. The plan does not have to be about investing, nor about the chance of losing money. It could be about better budgeting, working a few more years or about salary sacrificing into the company superannuation fund.

Without a fundamental re-think of what financial planning should be, and on what tenets it should be based and without a clear definition of what it is, it will continue to be regarded as a product selling industry. A name change, like ‘Life’ or ‘Lifestyle Planning’ will fool no one.