Usually in this column, I like to share some of the research relating to the relationship between money and happiness. This time, however, I’d like to talk about the direction of travel for financial advice in the UK. I’d like to pose you, the reader, this question: where are you on this path?
Advice version three
For many years now, we at the Institute for Financial Wellbeing (IFW) have referred to financial wellbeing as ‘advice version three’ (a term first coined by Ruth Sturkey during her time as Chair).
Financial advice, V1, is mainly technical. It provides advice on pensions, investments, tax planning.
Some twenty-five years ago, financial planning, V2, began to emerge. This adds planning for the future on top of technical advice, typically in the form of cash flow forecasting.
Financial wellbeing is V3 and is a natural extension of this evolution. It takes the ‘technical advice plus cash flow’ of V2 and adds knowledge about the relationship between money and wellbeing.
The result is financial planning which helps people to be happier, not just wealthier.
Skills upgrade
There are two additional skill sets needed by planners to upgrade from V2 to V3 (if you haven’t upgraded from V1 to V2 yet, then I’d suggest you are considerably behind the curve).
The first is to understand the sources of wellbeing in life, and how money can both help and hinder this.
I do come across advisers who don’t want to develop their proposition, saying their clients don’t want it
There is a huge amount of research and knowledge on this subject, from academia, philosophy, psychology, neuroscience, theology, and so on. I’ve written two books on the subject.
Secondly, the development of listening and questioning techniques in order to help the client apply these theories to their own lives. These are not skills that are required as part of the authorisation process, something I believe needs to change.
One way
This development of financial advice, to planning, to wellbeing is, in my view, inevitable. It is a one-way path, for both clients and advisers.
Imagine a client has a financial adviser who has been doing a very good job managing their money. They then meet a financial planner who also does a good job managing money, but also provides a cash flow forecast that gives clarity over their financial future. That client is very unlikely to return to just financial advice.
Chris Budd: Are your clients good with money?
Now suppose that client changes again, and now uses a financial planner who, in addition to the above, also understands the research on our relationship with money. They help the client to create a plan to a future which will make them happier. That client is very unlikely to return to just planning, and certainly not to just advice.
The research backs this up. One study by Aegon in 2022 showed that whereas 81% of clients want their adviser to talk about their life objectives, only 31% of advisers’ surveys thought that is what their clients wanted.
I do come across advisers who don’t want to develop their proposition, saying their clients don’t want it.
Whilst I would agree that not all clients want a financial wellbeing approach, I would suggest that every client bank contains many people who would – as evidenced by the research quoted above.
The advice journey
Financial planning is a very new profession. It only really began in the 1980s with the advent of the personal pension and the closure of so many defined benefit pension schemes.
I do come across advisers who don’t want to develop their proposition, saying their clients don’t want it
Increasing life expectancy also means that, for the first time in human history, planning for a period of life where we do not work but still need income has become one of life‘s priorities.
Financial planning is developing to meet this need. In 10 years time I can’t imagine there being a single regulated advice firm that doesn’t offer cash flow forecasting and full financial planning.
In 20 years’ time I can’t imagine there being any that don’t also have knowledge of the research on how money can both help and hinder wellbeing, and regular training on the softer skills to help clients apply this to their own lives.
If, as I believe, this pathway is inevitable, this leads me back to my challenge that I asked at the beginning of this piece. Where are you on this journey?
Chris Budd is author of The Four Cornerstones of Financial Wellbeing
His new Financial Wellbeing Pulse is a way of measuring the relationship with money and demonstrating the impact of your advice
