A wise adviser will challenge your views about money

Your planner should have a clear picture of your goals, says Barry O’Mahony, the head of Cape Town advisory firm Veritas Wealth Management. He was speaking at a recent meeting of the Acsis/Personal Finance Financial Planning Club. Martin Hesse reports

When you visit a financial planner to discuss your finances, are you sure that your discussion begins in the right place? It’s up to you, the client, to make sure it does.

As a starting point, Barry O’Mahony says, it’s important for you, the client, to know what you want from life. It is equally important that your planner knows what your goals are. Your goals will dictate what you want from your money.

“Once your planner understands your lifestyle goals, the decisions about how to use or invest your money become crystal clear,” O’Mahony says.

He gives the example of a client, Joe, aged 60. Joe’s mother had recently died, and he had inherited R2 million, which he wanted to invest. Joe told O’Mahony he had done his research, and knew what he wanted. He was a conservative investor, and wanted a low-risk investment with high returns.

O’Mahony says that for the first seven of his 10 years as a financial planner, he would have seized the opportunity to enlighten Joe about the different types of investments, asset allocation, risk, time frames, diversification, tax and cash flow. He would have fed Joe all this information, “absolutely loving it”, without Joe getting a word in.

But O’Mahony says he now knows that if he had done that, he and Joe would have started in the wrong place. What he did instead was to ask Joe some open questions about his life.

He lear nt that Joe has a senior position in his company and is earning well, with five years to retirement, but has a younger boss he doesn’t like. He has two boys: one son is in Australia, and has just had a baby; the other son is in London, also married with a young child. Joe’s wife is unhappy that she and Joe can’t regularly see their grandchildren.

Wi t h t h i s i n fo r m at i o n , O’Mahony was in a position to put a few scenarios to his client, instead of simply suggesting where to invest the R2 million. What if Joe and his wife holidayed in Australia and the United Kingdom alternately, each year, to see their grandchildren? And what if Joe stopped working today? Or could Joe reduce his salary by 70 percent and still have the financial security he needed? Joe’s R2 million could be invested in such a way that it would give him stability for the next five years, even if he were doing a less demanding job at only 30 percent of his current salary.

Joe was happily surprised. Instead of focusing on working for money, he could make money work for him.

INFO INFLOW

O’Mahony says one way to ensure that your financial planning discussion begins in the right place is to understand how the brain processes information and, as a result, what motivates our decisions. Information overload results in people “switching off ”. Some examples:

A man goes into a shop intent on buying a smartphone. The assistant, eager to share his knowledge, bombards him with technical information, comparing a Samsung and an iPhone. After 45 minutes, the bewildered man walks out, having bought nothing.

The Tesco supermarket chain in the UK found that less equals more. A bigger selection of jams to choose from didn’t result in higher sales. In fact, the opposite was true. They reduced the selection and sold more jam.

Financial planners in the UK found they were more successful at getting people to save for retirement when they showed them pictures of the lifestyle and accommodation their savings could buy than if they just talked in abstract figures.

O’Mahony says a book for children, My Brilliant Brain, by Linda Joyce Bruce and Lisa Cohen, describes in simple terms how three parts of your brain are involved in information processing.

The instinctual brain filters all incoming information. Action (fight or flight) is an immediate response. If overwhelmed, the filter, like a “sergeant-major”, shuts down the flow of information.

Information allowed through by the sergeant-major flows to your emotional brain, which is all about how we feel. Then, and only then, does the infor mation enter the thinking brain, responsible for our rational thought, O’Mahony says.

In Joe’s case, he was driven by the emotional desire to see his grandchildren, make his wife happy and be more content in his work environment. Once his emotional brain had processed these images, his thinking brain took over to analyse the options proposed by his planner.

With this in mind, it makes sense first to look at your goals – what you’re trying to achieve, and what would make you happy, O’Mahony says. These goals should determine your relationship with money, not the other way around.

The trend towards “lifestyle planning” reflects this change in approach. In their book How Much is Enough? (A&B Publishers), Arun Abey and Andrew Ford say lifestyle financial planning involves making money decisions that are consistent with your goals, rather than treating money as a measure of success.

“You need to develop a financial plan for yourself, not for your money,” Abey and Ford say, and identify three pillars to what they call your “bridge of well-being”:

1. Understand your values and goals;

2. Apply your human and financial resources to achieving those goals; and

3. Develop an investment strategy to realise your goals.

O’Mahony says it’s important to bear in mind that the decisions you make regarding your finances don’t only affect you and your future, they affect your loved ones and possibly employees who are financially dependent on you.

And if your planner launches into a monologue about returns on investment, asset allocation, risks, fees, estate duty and taxes, you need to get a word in edgeways, tell him to take the discussion back a step or two … and begin in the right place.