Veteran Financial Planner Jon Golding shares some tips about an overlooked opportunity for Financial Planners to do well by doing good. In a highly personal viewpoint, he suggests that an economy is only as strong as the quality of financial literacy and capability (FLC) of its people. 
As the IFP gets ready for Financial Planning Week 2014, its consumer awareness campaign running between November 23 and 29, he argues that planners have an implied responsibility to help clients understand how to make better-informed decisions which can only benefit the economy. He believes that in an increasingly bewildering financial world there is a chance for planners to change an outdated business model for advising clients on. Instead of 'advice', people need ongoing education, guidance and support on how to become financially self-reliant.

Looking at examples from around the world, he laments the lack of progress in this area so far but believes that some positive developments are under way.

Forgetting financial literacy and education must rank high in negligence league and was key in 2008 crisis

An opportunity exists today for Financial Planners to change an outdated business model for advising clients on products and services. Instead of 'advice', people need ongoing education, guidance and support on how to become financially self-reliant.

Financial products and services have become so sophisticated and numerous in the past 30 years that even advisers and customer services staff do not really understand how to deliver what used to be called 'best advice'. Today it is often 'best guess' since never have so many economies been so unpredictable.

Amid all this there is an urgent need for education. Financial advisers and planners are not as trusted today as seven years ago. Why? The US and EU financial services industries have experienced unprecedented turmoil and disrepute following the 2008 crisis. Total fines now exceed US$100 billion and have hit almost every leading financial institution. Overall costs, including bailouts of countries and banks, now run into the trillions.

There were two major causes of this systemic problem – greed and lack of FLC (Financial Literacy and Capability) education. There is no space here to deal with greed, which will always be a threat, but neglecting FLC education in a rapidly-evolving financial services industry must now rank high in the negligence league. Regrettably, most people do not understand what FLC means.

Lack of FLC at all levels of society, business and regulation has been a significant contributor to the 2008 crisis. Although the blame fell onto banking, banking was not the cause. The oxymoron 'investment banking' was exported from New York to London in the seventies which meant investments backed by bank deposits. But depositors were not aware of that, nor their non- bank advisers, until the collapse.

Even before investment banking products arrived, the FLC of UK financial services staff (including a fragmented regulatory framework at the time) were well below par. This gave easy entry to these novel financial instruments which were invented, extrapolated and spread globally through London, the world's most respected financial centre at the time. So why has this happened and how could it have been prevented?

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The 2008 crisis and much of the resulting collateral damage could have been prevented if FLC education was introduced in the seventies to keep the public, their advisers and regulators aware of the escalating growth and complexity of financial products and services. London is to blame for being the global platform for selling New York's inventive financial instruments.

But New York is to blame for the even bigger 1999 faux pas of repealing two key provisions of the 1933 Glass-Steagall Act which restricted affiliations between banks and securities firms. This overlap was a major cause of the crisis in the 1930s so the repeal was madness. Except this time it was even worse, they roped in the insurance industry. AIG, the world's largest insurance company had to be bailed out with US$85 billion of US taxpayers' money.

There is only one answer to prevent the next crisis occurring and that is immediate, widespread FLC education within schools, universities, families, businesses and even government regulatory agencies. This should in time reduce the knee-jerk, over-sized financial regulation which has followed. The unintended consequence of more stringent regulation after the 2013 Retail Distribution Review's implementation, is greater confusion and less personal attention to the average UK consumer's needs. The classification of financial advisers into 'independent' and 'restricted' categories removes the old-fashioned, but reliable, 'relationship-built-on-trust' standard from the market. This was the profile of bank managers up to the sixties; correctly rated then as the most reliable and trustworthy financial advisors.

Kay Baird, the sixth President of the US International Association for Financial Planning in 1981, then with under 10,000 members, said: "Prospects don't fail to buy your service because they don't want to; they fail to buy because they don't understand," Kay Baird, President IAFP, 1981 (USA).
I met Kay at my first Financial Planning conference in New Orleans in 1981 and we worked together subsequently. His quote is one of his best tenets of wisdom about the difference between selling and advising on financial products; even more apropos today due to clients needing to understand clearly what they are buying in a complex marketplace.

Financial products and services are not commodities or merchandise even though they are sold or acquired by transactions. They are intangible representations over the medium- to-long term while the economy and clients' personal circumstances do change unpredictably. So the duty of advisers is first to educate them to the required level about the benefits, risks, costs and suitability of choices discussed, that is it must be 'fit-for-purpose' for them, not 'fat-for-purse' for the advisers.

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Another invaluable quote to consider is this:
"People's financial behaviour may primarily depend on their intrinsic psychological attributes rather than information or skills or how they choose to deploy them." Professor David de Meza, LSE (UK). It came out of a 2008 FSA study (Financial Capability: A Behavioural Economics Perspective) led by Professor de Meza and his team from the London School of Economics. More on this shortly.

The third key point is even more profound. The FSA issued a severe warning to UK population to improve its personal financial capability eight years ago. But nothing seems to have happened since except mandatory financial education in secondary schools in 2014. And this was led by the PFEG charity and entrepreneur Martin Lewis, not the government.

However, no matter what advisers think of the regulator, it conducts the most extensive and informative surveys for the UK population on financial capability. In 2007, HM Treasury adopted the then FSA's definition of financial capability. This read: "A broad concept, encompassing people's knowledge and skills to understand their own financial circumstances, along with the motivation to take action. Financially capable consumers plan ahead, find and use information, know when to seek advice and can understand and act on this advice, leading to greater participation in the financial services market."

By contrast, the US and Australia have adopted the term 'financial literacy' with a different emphasis. There is no universal consensus on FLC yet. Planners should read the FSA/FCA survey reports (every year from 2005 to 2013) and the Money Advice Service's similar reports.

A 2005 FSA report which analyses the relationship between components of the information and advice environment points to consumer behaviour as being the key factor but it has only recently been given attention by practitioners. Behavioural finance is rapidly becoming a key ingredient of financial service education, similar to ethics. Research shows that financial advice should be carefully tailored to client behavioural issues in addition to other Know Your Client and fact-finding criteria. This includes Life Planning skills where planners go beyond fact sheets into their personal aspirations and life goals. But none of this is enough without considering the client's behavioural issues which are often deeply private and beyond the scope and skill of even experienced advisers. So what's the answer?

The answer is not gaining a PhD in psychology in addition to the raft of other qualifications needed today in this complex industry. The answer is to flip the coin and let consumers make their own decisions after being suitably educated by planners and advisers. There is no sense in trying to be a genius, whole-of-market, life planner adviser and expect to enjoy one's client community socially outside the office; not enough time in an 8-day week. Instead, clients (and prospects) need to be guided into self-learning which Financial Planning firms can provide through meetings and seminars.
The key to learning is in doing and in experiencing easily-correctable mistakes. This is the tried and tested Montessori method, now seen as relevant to adults as well as pre-schoolers. 'Experiential learning' allows for maximum creativity and behavioural fit of one's personality to challenges, because it allows for total honesty within the experience of one's private failures. The problem that planners have in trying to solve the problems of their clients is to get full disclosure of their fears, failures, insecurities, secrets and more. Highly unlikely unless you are a doctor. The next section flips the coin even further. This section is based on my personal experience in the 1980s with the leading US Financial Planning education firm Successful Money Management Seminars Inc. Jack Root and his family ran this business across the US from Portland, Oregon, serving a large number of Financial Planning firms. Jack later sold the business to a major financial services group. They continue to use his system successfully today as a resource for mainly fee-based practices.

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SMMS invited couples, preferably, to evening seminars over a four to six week period and trained them as they would their own staff in Financial Planning. During that period, the couples constructed their own personal Financial Plans using templates, fine-tuned by the presenters. What we learned from Jack was that the true Financial Planner is always the client, not the adviser. This is key to growing a business in which client loyalty can run on auto pilot and advisers can relax without fear of unintended mis-selling. The client is always in charge.

From the moment attendees begin building and owning their personal financial plans, at a relaxed weekly pace, advisers become their permanent coaches and mentors supported by a multi-skilled office team. There is obvious value- for-money in self-learning seminars. It is a good revenue source which also converts prospects to clients. Advisers can then 'have a life' by not being handcuffed to clients, as many are, since the firm's team is what the client buys, from Paraplanning to specialist tax advice. This model may not suit everyone but is highly stable and transferable for predictable value when partners or associates wishes to leave.

The digital world is now everywhere and everyone will continue to become increasingly dependent on it. The banks have closed their doors to giving financial advice to non- HNW customers. But RDR has opened the door to financial self-management by the public. This is an accident waiting to happen, especially digitally, since offering advice online is prohibited. Also, cyber-crime is the largest form of financial crime so the public faces dual risks. But prevention is possible. Planners and advisers should provide ongoing client education with effective and efficient execution of the decisions clients make. This can aggregate into a mass movement nationally to increase everyone's FLC which in turn benefits the economy.

Finally, London has miraculously just been rated the world's leading exporter of financial services. Financial Planners should realise that the City is back in favour and financial services education can gain them a competitive advantage at the same time as benefiting the economy.

JON GOLDING A FOUNDER MEMBER OF THE IFP

Jon Golding is Founder Chairman of the Caribbean Financial Planning Association and an IFP founder member. He has worked with individual, SME and corporate clients from many countries across the full range of financial services; banking, investment, insurance, tax, trusts, business turnarounds and acquisitions. His pro bono work includes financial education and mentoring startup entrepreneurs. He is a Chartered Banker, Chartered IT Professional, Chartered Fellow of the Chartered Institute for Securities & Investment and a school governor in London.

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