I do not feel that the advice industry, structurally, does anywhere near enough to support the development of macroeconomic knowledge among its participants.
Translating macro themes to clients, in my view, is a vital part of the job. Translating the academic debates among economists, and how it may impact a client’s financial plan under various scenarios, is an imperative part of the human and emotional management that makes financial planning so important.
Take inflation, for example. Inflation is without doubt the macro buzzword of current times as we emerge from the pandemic. It is also a significant factor in determining our economic environment and thus, our clients' journey with their financial plans.
The impact inflation potentially has on monetary policy, household debt, the equity and bond markets, government debt sustainability – and therefore taxation/fiscal policy – and asset allocation to name but a few, is hugely important to a client’s experience in the near term.
Being able to successfully educate clients on this allows advisers to discuss economic indicators and how various assets behave, relative to these indicators, over more meaningful periods of time.
Incorporating this as an important part of the fact-find process enables clients to have a deeper level of understanding around asset allocation, risk and investment strategy, which ultimately leads to better long-term outcomes for them. Technology is key to being able to do this, but knowing your macro is just as important.
While we plan for the long term to mitigate the impact of swinging macroeconomic environments and uncertainty, we as advisers need to be able to explain, in simple terms, how these various scenarios could play out and impact a client’s journey in the short and medium term.
Even if it means there is no detriment or change to the long-term plan, managing expectations will help clients be much more comfortable with these shifts in patterns. They all form part of the journey that one should expect to navigate over a 30-year plus time frame.
Putting into practice
We’ve found ourselves in a period of loose monetary policy, low interest rates and generous central bank support for the past 13 years and while the official narrative suggests this current inflationary environment is transitory, we should be discussing what the world could look like if it wasn’t.
We should be able to explain how rising interest rates might impact growth-leaning portfolios and various asset classes, or how governments have historically used inflation to offset long-term sovereign debt obligations.
We are not economists, far from it. We should not be predicting the likelihood of economic developments or central bank policies. But we should be able to translate various modern economic debates into what that could look like in applied terms, so it does not come as a shock to clients if the environment we’ve been used to for so long was to change.
This would help a client feel comfortable under many different market scenarios as these have been factored into the plan using sophisticated cash flow tools. It would also show a deeper understanding of the high-level events that impact the world of personal finance, which consequently fuels professionalism and trust in our industry, neither of which are still where they need to be.
The industry, particularly through the exams and qualification process, focuses heavily on product implications and treatments, taxation intricacies, planning and regulation.
I just can’t understand why there isn’t a paper on very basic applied macroeconomics, and how it applies to the financial planning profession. Advisers seem to be left to learn this on their own. I feel this should be a mandatory part of the initial qualification and ongoing CPD process. We touch on it, but nowhere near enough.
I’m probably preaching to the choir here, but I feel the industry as a whole has a long way to go to move away from product-focused and insular advice.
The emphasis on plan first, product second is a much-needed development and I am thankful for the pace at which this shift is being implemented.
I do, however, feel we can go one step further, and beef up our planning capabilities with a bit more macro knowledge.
Adam Cockerham is director and chartered financial planner at William Dixon & Associates
