If I had a tenner for every time someone asks me ‘why should I pay a financial planner/adviser/coach to help look after my finances.’ I’ll be very rich by now.
Imagine the look on someone’s face when I tell them ‘a financial planner/coach is someone who stands between you and stupid!’
This sketch by financial planner and author Carl Richards says it all.
Let’s face it, as humans we are naturally not very good at making good financial decisions. Scientists studying the relatively new field of behavioural finance have several evidence to show that the way our brain is wired means that our natural tendency is to act against our own economic interests.
In other words, we are not are not “rational” — the computer-like utility-maximizing machines that traditional economic theory assumes us to be — but “normal.” We are prone to cognitive errors. We may lack self-control, only seek evidence that proves our ideas, have excessive loss aversion, tend to be overconfident in our abilities, or thoughtlessly follow others.
There are many ways we sabotage ourselves;
- Using simple rules of thumb, which are fine most of the time but can sometimes lead us down the wrong path
- When investing, we are obsessed with beating the market (something that is almost impossible even for professionals.) Our emotions of fear and greed almost always gets in the way leading us to sell when the market is falling and buy when the market is rising (the exact opposite of we should do)
- We have the tendency to become a slave to fashion which means we following the crowd ((herding), something that costs us very dearly
- We naturally prefer to maintain the current situation (status-quo bias) and don’t like to change until someone or something nudges or forces us to. For instance, we continue to amass more debt or save too little even though we are well aware what we should be doing.
The truth is we all need someone to rein in the emotional saboteurs within us and stops us from making costly mistakes with money. Now, that may be any sensible individual; a friend or family member who understands money a bit more than we do.
But it is better done by a professional who trained in the art and science of financial life planning. Think about it this way, would you let an unqualified doctor perform a ‘minor’ surgery on you?
How comfortable are you with hiring a quark to fix an electric fault in your home? Think of the safety issues and potential hazards, especially if you have young children!
If we (mostly) insist on letting trained professionals handle our health and wellbeing, why wouldn’t we do the same with an equally important aspect of our lives – our finances?
A key aspect of financial planning is clarifying and quantifying your goals. As simple as this sound, it is actually incredibly complex, especially if a spouse is involved (as they should be.) This can lead to emotionally complex discussions that are far more productive with the help of someone who has experience facilitating such conversations.
Most of us haven’t the slightest idea of when we can retire, what kind of income we can expect, how much we need to save or where we should invest, for instance. In fact our best estimate is ‘the Lord will provide!’
Christmas is a particular time of the year renowned for doing dumb with money. We go into debt in the last 2 weeks of the year and spend the next 50 weeks paying it back! It’s dumb -we know but we do it anyway!
A financial planner/coach is a critical friend, someone who holds our hands and walks us through these and many other issues. They stop us from sabotaging ourselves; from doing dumb things with money!