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The financial planning delusion

The financial planning delusion

If you are involved in the financial advice industry, have a shot at answering this question: “Regardless of resources, why do some individuals achieve their financial goals when others do not?”

It’s an interesting problem that research has so far failed to answer.

According to the evidence, the answer is not that they should seek out a chartered financial planner. If an individual does not achieve financial freedom, it would possibly be a more accurate explanation to blame their father.

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We do know that financial planning has a positive effect on financial goals, but we do not know which elements and why. Retirement planning and investing, broadly, are controlled by planned behaviour theory. And good or poor outcomes experienced by our male parents or guardians will have an enormous effect.

Planned behaviour theory suggests an individual’s levels of self-efficacy and controllability will determine whether they reach their financial goals. Self-efficacy refers to their belief that they can achieve their goals; controllability refers to the level of control over the goal outcome. Control aspects are referred to as the locus of control (LOC) and this can be internal or external.

Individuals with a strong internal LOC tend to believe they are in control of their lives (and make great clients).Conversely, individuals with an external LOC tend to believe they are controlled by their environment. Blaming behaviours are usually prevalent with an external LOC. This is typified by excuses such as “I went to the wrong school”, “I don’t have the right connections”, “I don’t have a degree”, or “my family was dysfunctional”, together with being overweight.

So, to summarise why I would dismiss the current financial planning delusion:

•No amount of financial education will help individuals without considering planned behaviour theory.

•Financial planning is not always effective as individuals will look at good and poor outcomes of their parents or guardians, or those with influence.

•Individuals with an external LOC will not value financial planning or be made to feel they have control over their financial future.

•The amount of resources an individual possesses will have no bearing on the achievement of financial goals.

•For the financial planner to have an effect on financial objectives, they must recognise the levels of self-efficacy and controllability that the individual displays.

•Clients with a high external locus of control will tend to exhibit destructive behaviours (cashing in and losing money) and then make complaints.

Unless financial planners start to understand the theory behind how individuals reach financial freedom, they are simply presenting financial advice with reports and charts and deluding themselves and their clients into believing they have a positive effect on something they do not actually understand.

It is crucial to understand the human psychological process to financial freedom, not just the ISO22222 version of financial planning.

Richard Bishop is a lecturer in financial services at Coventry University College and a practising regulated financial adviser.