Here at Spencer Private Wealth, we enjoy encountering people at every stage of life, with different levels of financial knowledge. Sometimes it’s people who might be capable of handling their financial affairs, but they have better things to do with their time and are disinterested. Many would rather delegate because their lack of interest may lead to making mistakes. Other times, it’s people who are unsure and aren’t confident of handling their financial affairs. They realise they need to delegate because they are wary of making mistakes.
Then there’s another group. At one point they were confident they had the knowledge and discipline to handle their financial affairs. They wouldn’t dream of delegating, and due to this misplaced confidence, they ended up making a mistake, or multiple mistakes, because they didn’t learn from earlier mistakes.
What’s interesting is how long this behaviour can persist for. At some point, people glance at the clock and do a little bit of mental accounting. It’s weighing their age, the time they have left in the workforce, and how their finances are shaping up. If mistakes continue to be made then a comfortable retirement will be a dream, not a reality. This can lead to people either knuckling down and getting the basics right or doubling down on bad decisions.
Almost always we see these people in middle age. This is positive because they are looking to right the ship. Occasionally, these people are into retirement, but that is a rarity. They have stumbled into retirement with almost nothing but their home. They will admit that much of their savings or any wealth they had was frittered away on bad investments throughout the years. They didn’t learn from their mistakes, and they doubled down trying to recover old losses.
It’s just a fact that financial advisers can’t do much for retirement age people without any financial resources. It’s why we don’t encounter many of these retirees with terrible investment histories, but it does make us wonder how many are out there. The only reason we do encounter them is because they’ve had a stroke of luck. Despite their poor investment and money management history, some kind of windfall fell into their lap and now they’re looking for help.
Aside from the good fortune, these are sad tales. Firstly, these people have forgone so much wealth, not only their own hard-earned money, but also the opportunity cost of what it could have grown to. Secondly, they’ve spent their whole lives in a financial fog without any direction. The windfall may save them, but it also may not. They still need to abandon any preconceived investment notions and accept their prior investment history was bad management and not simply bad luck.
How does it get this bad? How can people spend their whole lives in a state of financial confusion?
At one point we were in an information desert. 25 years ago, the internet was still in its infancy. Using the internet plugged up the telephone line and we didn’t have mobiles to compensate. That left the library and the media as the most reliable sources of information.
Maybe fifteen years ago, ADSL internet started to become more commonplace. You didn’t have to dial in anymore. There was a dedicated line of information into your house. Today, data will follow you anywhere you can get mobile reception. It’s an information flood. People have gone directly from an environment with a lack of information to being overwhelmed with information.
To place this in an investment context, it’s only a little over 20 years ago that we and many of our likeminded colleagues settled on our investment philosophy. Investing was an information desert. It was often dominated by sales reps from big institutions pushing their latest ideas and the media repeating those ideas. Advisers who knew something was amiss tried to do their own research, but they were often chasing their tail sifting through last year’s best funds. Some advisers will speak of their former careers as stockbrokers or bank advisers where they realised something wasn’t quite right. Their employer’s focus wasn’t on doing what was best for the client, it was churning accounts or pushing in-house products.
With this in mind, there should be some sympathy for the average person who may have pinballed around a sequence of bad investment decisions. If the professionals struggled to land on a reliable set of investment beliefs until only two decades ago, what chance did the individual have? Today things are better, the credible information is certainly out there, but landing on it remains a challenge.
If someone is determined to go it alone, they will need to do their due diligence on the information they are working with. They will need to honestly assess what their capabilities are, how clear they are on their direction, and do their decisions withstand scrutiny? What’s the best way to assess?
Asking some questions. Two key questions will quickly sort things out.
What are your investment beliefs? Someone investing a certain way should be able to justify why. If someone has an adviser, they probably don’t need to because the adviser should have a robust investment philosophy on their behalf, though it’s still good to be informed.
The beauty of this question is it’s simple, but it’s also pointed. When this question is put to some investors it will elicit a confused or nervous response. Misplaced confidence quickly evaporates. It’s not about memory recall or being caught out with a “gotcha”, an investor could still have a statement on paper that outlines their beliefs. Not having anything to refer to highlights an investor who doesn’t know what they should: what’s underpinning their investment decisions. That should be a concern. Despite the fact they can’t articulate what they believe, they are confidently investing their money without a worry in the world!
Why do you have the insurance coverage you do? This is equally as important as the investment question. If you or your family expect to rely on a payment or payments in the event of some adverse outcome, then the policies protecting against these outcomes should be watertight.
Insurance policies can be complex, and people have been known to take them out on the headline print, while ignoring the fine print. If someone needs to justify why they hold a specific policy beyond “oh that’s for income protection or critical illness” it will narrow the focus further. For example, on income protection: is the policy indexed? What’s the cover timeframe? Does income need to be substantiated at claim time? If someone doesn’t know these things or isn’t even aware of them, then how reliable is their insurance coverage?
Then follow up questions, if the first two questions are addressed:
Why are your assets held in the structures they are?
Why is your estate planning done this way?
If someone can’t adequately answer the more straight forward investing and insurance questions, then it’s unlikely these more technical questions will be answered with confidence. It tells them all they need to know about the direction they’re heading. They need to pause and be better prepared. Otherwise, they need someone who can answer those questions for them.
Questions are a great way to go on a discovery process. Be that to gain more knowledge or expose what you may not know. More knowledge feels positive, while exposing a knowledge gap feels negative. A reason why someone may shy away from it, but they both lead to the same place: increased understanding.
Being prepared to ask uncomfortable questions in the now can help avoid uncomfortable outcomes in the future. No need to spend a lifetime stumbling around in the fog.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
WIth thanks to FYG Planners for this article