Mind reading

Get inside your client's head to help them control their emotions when it comes to financial planning, says Steven Hennessy

Sybil Fawlty's specialist subject, according to husband Basil, was 'the bleeding obvious'. If, instead of running a Torquay hotel, she had chosen to pursue a career in financial planning, she might have observed the following: a professional adviser's fundamental duty is to empower others, financial planners do this by positively influencing financial decision-making for clients, and the first step is to fully understand an individual's present circumstances. It's this last point I want to look at closely.

Far too many individuals and (still, regrettably) their financial advisers, focus on the diverse array of potential 'solutions' and outcomes available to them before taking sufficient time to truly know their position.

Perhaps this is understandable. The financial services industry is geared towards marketing the notion that there is something 'out there' (a product, a fund, an investment-house view) that can improve a private client's situation by protecting them from something else 'out there' (inflation, bond yields, emerging markets, tech-stock bubbles).

It is tempting to get sucked in by all these shiny, sparkly panaceas and rush through the essential fact-finding and data gathering. Moreover, this focus on the external environment compounds our innate tendency to employ excessive emotion in our decision-making. It's a factor that I believe deserves far more attention from private client advisers.

Ineffective financial management is a bit like not eating properly or not getting enough exercise, with a crucial - often overlooked - difference: everybody knows about diet and fitness. However, when it comes to money, people make financial choices and pursue strategies that they believe are effective, but are in fact impeding progress. Particularly relevant in this context is the unconscious transference to clients of an adviser's own attitudes to money and risk.

Our value to clients can only increase, therefore, if we become more adept at identifying when and why we and our clients are making these errors. As a profession, we need to better understand the growing body of research broadly labelled 'behavioural science', which demonstrates again and again that people are often lousy at decision-making.

Food for thought

This is not to say that we are completely useless, of course. Many of us are 'healthy' most of the time, and the majority of our actions and judgements are usually appropriate. But the truth is, managing personal finances effectively is a very simple activity that a surprisingly large portion of the population gets wrong.

By way of example, ask any group of people if they want £100 today or £101 in a week and I think the majority will opt for the former - even though the implied interest rate is 52 per cent APR!

Now, you might think that this reveals nothing new about how human beings are predisposed to instant gratification. But ask that same group if they want £100 a year from today, or £101 in one year and one week and they will overwhelmingly pick the latter option.

Mathematically, the options are equivalent and yet the same individuals pick different options - because they are 'thinking' with the 'wrong' part of their brain.

We all recognise that our behaviour is sometimes a complicated mix of animalistic emotions and instincts (controlled by the limbic system of the brain, and characterised by our mammalian need for immediate reward: "I will have the chocolate cake") and a more rational, deliberative approach (associated with the prefrontal cortex, which directs our higher cognitive thoughts: "I will have an apple").

By first increasing our own understanding of these traits and then our clients', we can empower them to take control over their behaviour to improve their financial future. Such an approach ensures they have the confidence to make informed decisions that will support the achievement of their goals and aspirations.

We may not be responsible for our clients' prior behavioural tendencies, but we are responsible for once we are alerted to them and their consequences.

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