Guts for garters

We have a propensity to make poor financial choices because of 'systematic' errors in our thoughts (see previous blog, 'Mind reading'). This is not to say we are incapable of thinking clearly or following an optimal course of action to further a personal objective. The vast and growing discipline of behavioural economics has revealed that our cognitive toolbox built up over time, and many of the idiosyncracies and biases that afflict our financial decisions are deeply rooted in our psychological make-up.

This is not just a concern for our clients. Advisers regularly make decisions on gut instinct about issues that would benefit from far more rational analysis and forethought. We are prone to reject the measured approach because it requires extra energy. The science confirms what most of us already know: self-control and will are tiring to an inherently lazy ape. This is a broad point, and not just limited to the realm of financial decision-making.

Intriguingly, even when we can deliberate over options, we often plump for the one that makes us feel better. This is despite our ability to discern, with little extra effort, that its alternative is preferable by any rational measure.

This tendency to cruise on a comfortable (though often self-defeating and calamitous) autopilot is particularly severe when we feel vulnerable, threatened or insecure. So private client advisers working with individuals who, perhaps through bereavement or separation, are likely to crave quick or instant emotional fixes, must put structure and process in place to help those clients make more and better informed decisions about their wealth.

I call this structure a 'financial plan', and the process 'financial planning'. Financial planning is an individual's best defence against their innate ability to put immediate wants in front of future needs and objectives. A plan will ensure that their values and lifestyle goals are at the heart of every financial decision they make, and every subsequent action.

First steps

Many clients who've had a huge upheaval in their personal life tend to jump as quickly as possible into problem-solving mode. It's understandable. A bit of spontaneity can spice up your life, but having no long-term context for financial decisions is counterproductive.

An obvious starting point for a more measured approach to wealth management is encouraging clients to write down their realistic short-, medium- and long-term goals. Providing people with time and space to think over this task and be as detailed as possible will make the rest of the work much easier.

Crucially, this is not an exercise centred on questions of money. Family, friendships, career, travel, health, creativity and volunteering all need consideration too. What do clients want to have and want to do throughout the rest of their life?

Next, they must understand their assets and liabilities, income and expenditure, as well as how these are likely to evolve over time. Rather than a dry-run of the pros and cons of pensions and ISAs, a true understanding of these financial resources is best achieved by relating them to the specific personal context of the individual's life.

Linking a future income stream to a future cost is quite helpful, for example. I often relate a client's basic state pension forecast to their current council tax and utility bills, then they can see that some of the more mundane aspects of their financial life are already funded and start to think about the fun stuff and how that is funded.

Only when you've done this groundwork can you start to make sense of their financial life. And you can educate them about the options available as they seek to order their affairs in pursuit of achieving life goals. Trust me, this is far more exciting for both parties than just providing another layer of complexity by talking about bid-offer spreads and total expense ratios.

There is no reason why living for today and planning for tomorrow should be mutually exclusive. No matter how complex a client's circumstances, they will be better off taking control and focusing on their life goals than worrying about the FTSE 100 or bond yields.

Working with them to design, implement and maintain a financial plan that reflects their goals, principles and values is a privilege. Most importantly, it will give them the benefit of controlling their present and their future.

Steven Hennessy is a chartered financial planner and associate director at Myers Davison Ginger

He writes a regular blog about financial planning for Private Client Adviser