I am always surprised when I ask a financial planner about their financial planning or investment philosophy and get a blank stare in response. When it comes to a financial planning philosophy the most common retort is that they follow the six-step financial planning process. But a process is not a philosophy. And regarding investing, I’m usually told that it is the investment managers who have the philosophies and that the job of a financial planner is to combine different philosophies when they choose investment managers.
What is a philosophy?
In literal terms, it is a “love of wisdom” and is usually associated with the concept of “fundamental truth”. People who study philosophy are trying to understand the fundamental truths about the world we live in. When we think about it as a practical application, it can be defined as
a theory or attitude that acts as a guiding principle for behaviour
Therefore, the concept of having a philosophy is so important for a financial planner, because without a philosophy around advice and investing, what is the guiding principle that you use to influence the behaviour of clients?
Financial planners often use terms such as educating, guiding, coaching, and even mentoring, when describing how they influence client behaviour. These are all great concepts, and each is effective in its own way. However, their impact is likely to be muted if not informed by a consistent and sound philosophy around advice and investing.
What constitutes a financial planning philosophy?
I believe it’s articulating for your clients what you believe are fundamental truths about financial planning. At the core, you may wish to tell your clients that you are a partner in their decision-making, not an order taker.
You may want to share beliefs like, needs are more important than wants, or return on life is as important as return on money. If clients don’t agree with your philosophy, then they will know immediately that you are not the right financial planner for them. Some financial planners have labels for their philosophy, like Lifestyle Financial Planning, Goal-based Planning or Financial Life Planning. The label is less important than having a philosophy, which will inform your financial planning approach.
When it comes to investing, fundamental truths would include concepts such as: investing is a means to an end; risk and return are related; time in the market is more important than trying to time the market; and we can’t predict the future which is why diversifying investments is so important. If clients are clear on your investment philosophy and know the fundamental truths of investing, they are unlikely to come to you asking about your latest hot share or crypto pick. But if they do, you can remind them of your investment philosophy and encourage them to see another financial planner if they really want that hot pick.
The power of having a strong philosophy was demonstrated in a different context in the recent political negotiations to form a Government of National Unity. Fikile Mbalula, the Secretary General of the ANC, spoke about how it was much easier to deal with parties who had a clear ideology, or political philosophy, than with parties whose ideology “changed with the weather”. It’s much easier to deal with people if you know where they stand. As we have seen in the political negotiations, this doesn’t mean the conversations will be easy or quickly resolved. Having a clear financial planning and investment philosophy doesn’t make your conversations easier or quicker with clients, but it does mean that your clients will know what you stand for. This will help you attract like-minded clients and is a critical starting point for being able to influence their behaviour on an ongoing basis.
| The 7 Pillars of Financial Health Based on insights gleaned from coaching and consulting with hundreds of financial and investment advisors over a career spanning 25 years, Rob Macdonald, Fundhouse, has recently published a book The 7 Pillars of Financial Health. Macdonald outlines why we need to radically rethink how we approach money in this compelling read, which is highly recommended for advisors who want to remain relevant in their professions. Similarly, it contains practical information that clients could use in the process of dealing with investment concerns. As Warren Ingram writes in the foreword, The 7 Pillars of Financial Health is not only aimed at professional planners: “Whether you’re a seasoned investor, a young professional just starting out, or simply an individual seeking financial well-being, this book will revolutionise your understanding of money and its role in shaping a fulfilling life.” Macdonald suggests that money ranks as a leading source of relational conflict and household stress in surveys worldwide despite the abundance of information and technology to help us manage it. In the introduction, he says that we go wrong by failing to recognise how completely interconnected and interdependent our lives and our money are. Macdonald uses the analogy of our physical health. We all know what to do to be physically healthy – eat healthily, exercise regularly, get enough sleep and limit our stress levels. But we struggle to do this because we are human. We are tempted by chocolate cake, delicious wine and the fact that Netflix is much more fun than going to the gym. He says, “The foibles of being human are summed up by the quip that ‘we spend our health to gain our wealth then spend our wealth to regain our health.” To overcome the challenges of being human while developing financial health, he enlarges seven skills that we need to work on throughout our lives. |
