Trust alone will not suffice

A stark reminder occurred this week.  Someone very close to me whom I have known all of my life, asked for financial advice.  I seldom give financial advice without a plan (with regard to investing) and therefore spent some time challenging the budget, determining expectations (the person is age 69) and questioning possible cash / capital requirements in the short to medium term (car upgrade, home maintenance, travel).

The capital remaining after a protracted relationship breakdown, sale and purchase of property and home refurbishment was around $250k.  We decided on a $50k buffer / cash emergency fund – in the bank.  Some of which was earmarked for capital expenditure, some purely as a reserve.

We discussed life expectancy, multi generational wealth (how much was expected to be left to the children), estate planning and lifestyle.  The weekly budget was in deficit to the tune of around $100 per week.  (Income from NZ super, capital from term deposits, and interest from term deposits).

A simple plan outlined some options.

1. A 4% draw down of $8,000 per annum would equal a $150 per week supplement to the pension and balance the weekly budget (and likely retain capital long term).
2. A greater monthly draw down of say $1,000 ($230 per week) would enhance lifestyle – but likely erode all capital over the next 20 years.

What happened – nothing.  The problem.  Not trust but lack of understanding.  Option B was simply incomprehensible.  The fact that what was being spent now exceeded income was misunderstood.  The fact that purchasing power over the next 20 years would be seriously eroded was misunderstood.  The fact that any draw down could be adjusted was misunderstood – i.e. not spent or reinvested.  The fact that the plan and its implementation was flexible was misunderstood.  What was understood was that there would no longer be $250k in the bank – it would be in some misunderstood nebulous fund for which an inch and a half of documents needed to be signed in comparison to the banks one pager.  It was easier to stay in the bank.

This example case study will be happening daily all over NZ and the rest of the world.

As an experienced and qualified financial planner I can’t save everyone that requests assistance – I know that and have known it for many years.  The age group I have just described in the case study however is the most at risk a) they are the children of parents that lived through two world wars and the depression – they cannot be unaffected by this upbringing b) the governments under which they have been subjected from the 1930s post depression years – have predominantly preached welfarism and delivered on that promise c) their financial literacy is fundamentally self taught and narrowly focused.

But what it made me do was to think about how to better educate and advise.  A checklist comparing savings in a Commercial trading bank versus investment using managed funds.  It made me think about how to simplify the mammoth screeds of compliance requirement expected of us as AFA’s and CFP’s – not to circumvent the best practice engagement process but to provide a plain English summary.  It made me think about the next generation – how to prepare them for this experience, both financial professionals and clients.  It made me think about how to explain a custodial service, managed fund fees, asset classes and mean reversion, volatility and risk.

But mostly it made me realise that without understanding, people should not proceed – and my role therefore is to provide greater understanding.  To better listen, better probe and better explain.  Unless the client knows we understand – business will not be transacted.  A stark reminder – for which I put my hand up and say – guilty your honour – but I will repent.

The information provided in this blog is not intended to be a substitute for professional advice. You may seek appropriate personalised financial advice from a qualified professional to suit your individual circumstances.