Fear and greed are words that are rarely used in financial planning. I’ve often wondered why – are we planners being too soft on raw features of behaviour? Do we allow professional politeness and discretion to stomp all over basic, honest advice?
Fear and greed are two fairly common observations a financial planner encounters in their day-to-day life. Fear is simply the outer edge of worry, and greed is merely the exposed blade of over-enthusiastic dreams. So how do they actually play out in the world of financial planning?
Let’s tackle the most obvious one first – fear. What is it that people fear when pondering financial matters? Let’s make a list:
- Fear of losing what you already have – House, car, boat, precious assets and memorabilia, a job, a career, a beloved partner, child, family member or friend.
- Fear of not reaching a financial objective – Not reaching a target to pay off your home loan, not saving enough for regular holidays, not getting that pay rise, not having enough to retire at the age you planned, being unable to help your children financially as much as you wanted to, not having enough cash reserves so that you don’t have to worry about month-to-month bills and those irritating one-off expenses like car or house repairs or medical bills.
- Fear of being seen as a failure – The phrase “keeping up with the Jones'” has received bad publicity but it is a very real ‘thing’ that we all must cope with in what is a very wealthy society (and Australia is one of the world’s weathiest societies – whether you feel part of that or not!). The fear of being seen as a financial failure may not be an obvious prime motivator – but it is nevertheless a thought that will linger at the back of many people’s minds – especially the breadwinner of a family unit. To some extent single people can feel this fear even more sharply, as they will not have a ‘lovely family’ to anchor their sense of individual self-worth and success.
- Fear of leaving your loved ones in a bad financial position – What if? This is a nebulous sort of fear but again, it is very real. What if I were to pass away – what position would I be leaving my loved ones in? What legacy would I be leaving? Will I leave a tidy, well-thought-out mix of financial outcomes and bequests that help cushion some of the emotional turmoil my death would cause? If I were to lose control of my faculties, will I be leaving a mess for someone – anyone – to sort out?
Nobody wants to be seen as ‘greedy’. Our society is based on democratic capitalist principles, liberally sprinkled with a mix of religious ideals and secular beliefs in ‘a fair go’ (as John Howard to famously put it). In other words, we accept that making money is a good aim, and obtaining a comfortable financial position can reasonably be seen as one part of being a successful individual. On the other hand, we believe that every individual should have their say and has worth simply by being in our community. Therefore, making money at all costs and trampling on others to get ahead, is generally seen as being ‘greedy’, and is frowned upon.
And there you have a conundrum, don’t you?
For every person who buys a ‘bargain’, there is a person on the other side of the transaction, who could feel they have been taken advantage of. For every person who does well financially and pays larger taxes, there could be a feeling that those taxes are going to people who haven’t had to work at all. Some come into money through inheritance, ‘luck’ or accident and may continue to act as if every single dollar must be kept at all costs (where does ‘stingy’ meet ‘greedy’?).
So what aspects of greed are there in financial planning?
- Wanting what others have – Perhaps this is best labeled ‘envy’ but you say tomatoes and I say tomatoes.
- Wanting what is unlikely to be achieved – Is this simply ‘dreaming big’ or is this greed? Again, I say potatoes/potatoes.
- Wanting everything – actually, this shouldn’t really be seen as greed – but it’s a pretty good contestant for the title. Here’s an example – “I want high returns, no risk, no fees; I want it to be simple to understand and I don’t want to pay any taxes on what I make.”
- Not caring about anything other than making money – Believe it or not, this is a rare position to encounter in financial planning, which is an outcome that my philosophical side takes great comfort from. Most people are happy to pay some form of tax when they have made a profit – so long as the taxes seem ‘reasonable’. Most people don’t want to put everything at risk just for a chance to make money – I guess those people never leave the casino to visit a financial planner anyway.
Super-sharp readers would notice that these are internal fears locked within an individual. All I have covered here are standard human frailties, and it would be foolish to expect people to all fit some measure of the ‘ideal’. Some would say that the real world is stark and hard and brutal, and not really interested in your feelings, ethics, judgments and preferences. Maybe. However, a financial planner has legal and ethical and moral rules and standards and imperatives that must be followed, so all of these aspects of money and finances must be covered at some stage or another in a financial planner’s career. So I am sharing with you a few of my thoughts in the area.
Those same super-sharp readers would now be asking how all of this relates to the world of financial planning itself. Not the vagaries of individual habits and preferences but the world of seeking financial advice and assistance with money and finances. OK. Let’s tackle fear and greed in the world of financial planning.
Fear and greed in financial planning
Now I will look at where fear and greed might come to play in financial planning..
At the end of this post, I’ll spend a few paragraphs providing an opinion on some of the material that regularly passes my desk regarding financial planners, and where I think there are distortions in impressions of fear and greed in planning. I’ve separated these paragraphs out for those who think all planners are crooks, and those who think an ‘inside opinion’ must be too biased to hold validity.
For everyone else, I’ve set out below my thoughts – which are that financial planning is a tool that can help avoid fear and greed, if everyone acts for their best interest and in an air of open, honest and transparent communication.
Most of my appointments do not involve very many elements of fear and greed. Most of my appointments are about people just trying to do a little better with their finances, and seeking the opinion of a ‘disinterested observer’ whose job is to give feedback about keeping on track.
Fear is usually used in the context of losing money
Since the Global Financial Crisis (“GFC”), a large part of financial planning has been fixated on the idea of not losing money. Another version of this is trying to ensure that investors are not exposed to too much volatility or potential falling values. These are good objectives a lot of the time but there are times when this is definitely not the objective. When market recover (as broad markets generally do), those people who have sat back in fear, hoping to preserve their hard earned money, suddenly find that investment returns have been quite good, and their own returns not very good at all. At this point in time, people begin to worry about not making enough money. Although this sounds a little foolish, it is a genuine concern, and even has its own phrase – FOMO (Fear of Missing Out). So the last 10 years have seen a lot of investors move from a desire for higher returns to a desire to protect their capital and back to a desire for higher returns. Where do financial planners come into this?
Well, firstly, financial planners must ensure that fear and greed are NOT driving decision-making.
Greed – It’s hard to beat the average
It is important that the realistic return expectations are kept loud and bright at centre stage. An example would be websites, newsletters, advisers or businesses offering or even advertising “18% returns since inception”. Simply put, that is a ridiculous and misleading statement, as it means nothing in terms of whether that performance is likely to be repeated. In fact, many studies suggest that such performance too far from “average”, is more likely to indicate future periods of lower than average performance. It’s a bit of a guess really. I have even seen some studies suggesting that a small portion of higher-than-average performing professional managers are able to retain their out-performance over cycles, which tends to suggest you stick with high performing investments. Yet that also is a false assumption, and can be very misleading as a basis for decision making in retail financial planning.
Fear – a little is good, a lot is not so good
A little bit of fear can be a good thing. It can add caution to decision making and it can ensure a person remains wary of the possibility of failure or Murphy’s Law jumping in the way of well thought out planning. However, too much fear can lead to people making poor decisions and failing to obtain the sort of outcomes they possibly could have obtained.
A lot of tools that financial planners use to assess risk and return are based on dealing with fear more than helping to obtain better potential returns. That doesn’t mean greed is good. It just means you should be careful of letting the fear of losing money stop you from the possibility of making a higher return.
Fear of your financial planner’s greed!
Now there’s an interesting fear. For those who are used to dealing with financial planners, it’s all a bit of an overblown story. However, for those who have never used the services of a financial planner before, it can all be a bit intimidating. After all, the financial planner is the expert in money, and if they decide they want to ‘take you for a ride’ then how are you to know when it happens? Yet such fears should not stop a person from seeking financial planning advice.
I have met very, very few financial planners who don’t try their best to do their best by their every client. It’s rare to meet a planner that I would think was doing ‘the wrong thing’. Most are passionately caring about their clients and the work that they do for them. Most are fervent believers in the validity and honesty of their approach to planning and the value of what they do.
So why has it become so “standard” to think that financial planners are only out to grab your money and run?
There are some websites and groups that seem to encourage this sort of thinking. I am a member of a number of sites and have ended up on email lists of groups that seem to take this approach. Some are incredibly vociferous in their dislike of all financial planners. From those who have actually been ‘bitten’ it makes sense but for others, it does not make sense at all.
If you received bad advice from a bad coach on your exercise regime, would you decide to never get advice from a professional coach again? It would be a strange decision to do so. Yet I have encountered many people who have taken this approach.
In the modern world, all you have to do is to ask.
Just ask a financial planner!
A financial planner cannot sell you a product or make a recommendation without putting it in writing (in a “Statement of Advice”) and that document will tell you how much the adviser is making from the recommendation, and it should also tell you what form of bias may be influencing that recommendation (although some of the requirements in this area are a bit too easy to avoid).
So you should be in a position to make a valid decision.
And most planners would be happy to give you an overview of their fees and charges, and an estimate of your cost. All you have to do is to ask.
Do that, and financial planning should be a more enjoyable and rewarding experience, with less fear and no greed.
Do all planners really act on fear and greed?
Over the years since the Global Financial Crisis (the good ol’ “GFC”), there have been a number of what I will call ‘memes’ that have become entrenched in Australia’s public mindset regarding financial planners and the role that they have and the manner in which they fulfill that role. Most of those memes are heavily negative. They usually imply that financial planners are greedy, uncaring risk takers who will do anything to benefit themselves at the cost of their clients. From my highly biased point of view, a good deal of this angst has been been fostered by the campaigning of industry super funds, a misunderstanding of the obligations under which a financial planner acts – especially those under a bank-related dealer licence, and the marketing of self-help newsletters and promoters of strategies that see financial planners as competitors. All of which could be seen as good old market competition doing what it does to make our world more efficient and is therefore a good thing. I don’t think that is the case but many people do.
Examples of fear and greed
Disasters displaying fear and greed, such as the Storm collapse, Managed Investment Schemes (“MIS”) collapses, and the tax problems these caused people, the Prime property trust debacle – that is still being played out in the courts all these years later, Commonwealth Bank planning abuses, ANZ’s planning fee issues, Macquarie’s planner problems, planners flogging Self Managed Super Funds and numerous other instances have left an impression of a planning industry that simply does not follow the best interests of the people who try to engage its services.
Planners are a diverse lot
Of course, even aside from these disasters and their impact on many planning clients, a good deal of the negativity to financial planners has been self-inflicted. There is no coherent single body that represents all financial planners. There isn’t even a single description of job function/activity that can apply to all financial planners. To a large extent, financial planning is still a ‘cottage industry’, with a large number of individuals or small groups operating under very different business models. When a financial planner or a financial planning group collapses or does the wrong thing then it is quite easy to tar the entire industry by the same brush of being based on fear and greed.
To my mind, the financial planning world in Australia lacks a representative who can stand back and provide a balanced view. Instead, I look on as one part of the financial planning industry berates another part or all planners just step back and say “it wasn’t me”. There isn’t a lot of objective thinking going on in the world of financial planning, and those who see financial planners as competitors happily take advantage of that fact. Strangely, most studies I have been exposed to seem to indicate that all of this palaver does not impact too much on those clients who already have a financial planner they regularly deal with. Many clients in regular contact with their planners manage to continue their relationship even with all of the negative noise.
Fear and greed aren’t the big issues in planning..
In my case, it’s been a rather dispiriting 10 years, to watch an almost daily articles and commentary that use questionable material to debase thousands of planners based on the actions of a few – or even worse, when false planner meme’s are taken as being ‘public knowledge’ or somehow factually correct. The vast bulk of financial planner debacles and issues have been a result of a faulted regulatory framework. A lot of investment issues have been a matter of product failure – for which planners should not be blamed. The regulatory framework forces all planners to act under a “dealer’s licence”, which virtually forces most planners to join bank-based or businesses that have an interest in selling particular products. That’s not planning – it’s just trying to sell products in the most appropriate way. Failed products include MIS projects and many, many investments that simply didn’t work the way they were supposed to. The newer regulations should do a lot to improve the quality of advice provided to the public but the cost will be that most people won’t want to pay what it costs, and those people will end up going to their super funds or bank based businesses, and receiving inherently biased advice. At this point, I feel I should fall back on a Seinfeld comment.. “not that there’s anything wrong with that..”
But the future looks brighter
Eventually, the introduction of higher education standards, an annual planner exam and massive regulatory hurdles should all result in an ability of individual advisers being directly licensed by the regulator ASIC, and audited by independent auditors. When that happens, you are more likely to see “product flogging” and biased advice fall by the wayside. All of which should help put a lid on fear and greed influencing financial planning. But that is just my opinion…
The Great Disclaimer
Nothing in this post or on this site is to be taken to be personal financial advice. It is general commentary only, and must not be used as a basis for making financial decisions. A great place to go for a broad look at financial planning issues is the Moneysmart website, operated by the financial services industry regulator, ASIC.