The Trouble with Money

It has been recorded by various surveys that the single biggest cause of disagreements between couples is money. This doesn’t just apply to those who only have modest means but across the board, right up to the very wealthy.

One of the fundamental reasons for this, is that people and their advisers see money as the object of the financial advice they receive, rather than one of the subjects that need to be considered. What we mean by this, is that the accumulation or growing of wealth is often seen as the main reason for taking the advice in the first place. In other words, the entire thrust of the discussions that advisers hold with their clients, revolves around how fast and by how much a particular financial product can best achieve this alchemy. The process involves the production of shiny bits of literature, with past performance statistics that always seem to show the product or portfolio under consideration in a very positive light. This is a deeply flawed “one trick pony “ approach to financial advice and the result is that in the longer term, when the product or portfolio fails to deliver, the client ends up with a poor experience and wonders what they have gained from their interaction with a so called financial professional.

This process has been used by the vast majority of the financial services industry for many years and the reason for it is simple, unless the adviser sold something they didn’t get paid. Even in the post Retail Distribution Review (RDR) world where commission has been banned on the sale of investment products, the situation hasn’t changed, all that’s changed is the point of attack of the argument.  Advisers, Stockbrokers and Wealth Managers will still argue that you should place your money with them, because they can either grow it faster than the opposition or at the same pace but with lower volatility. No one ever seems to ask the really important question, what’s it all for?

It has been our view for many years now that the money doesn’t actually matter, it’s what it needs to be used for that does, and this subject should account for 90% of the discussions you have with your Wealth Manager, not how the money is invested. If you think of the investment as nothing more than an engine chugging away in the background, producing returns for your financial plan, how those returns are created is of little importance. Legacy experience tell us that as soon as you start to talk about important sounding things such as “efficient frontiers”, “cost of capital”, “diversification”, “Alpha” and market Beta”, people just glaze over and disengage.  In other words, turn the equation around and start asking what it is you want out of life and identify these things, rather than how to grow your wealth in the fastest possible way.

Successful financial planning is about making money subservient to what it is to be used for, rather than your life being subservient to the money. Once this concept is grasped and the necessary cash flow forecasts are constructed, identifying how much wealth you will need to achieve this, along with the degree of risk you are prepared to take; the answers that people seek when disagreeing about money become clear. Questions such as ”when can we retire?”, “how are we going to afford the children’s education?”, “what can we spend on holidays?” are all answered, and statements like “we can’t afford that” are no longer relevant as you either know for sure whether you can or you can’t.

If you have money beyond what is required, you can then decide whether you just want to spend it, pass it to the next generation or use it for philanthropic interests. Our lives are relatively short and saving money beyond what is required is pointless, as we all know you can’t take it with you.

The key to successful financial planning therefore is to demote the importance of money, promote what you want out of your lives, understand what you need to do to get there and then enjoy the ride.

Managing money is not that complicated but many people will try and make you believe that it is. Managing people’s lives is far more complicated but this is where the real benefits are to be found.

Ask yourself this, what’s more important to you, beating some arbitrary index or living the life you want?