Blue Chip Issue 96

BLUECHIPCLIENT

BLUECHIPCLIENT ENGAGEMENT | Behavioural financeAn introduction tofinancial wellbeingWhat is financial wellbeing? And why do you need to care?Financial wellbeing is a term that describes all aspects ofthe relationship between money and happiness. It ismore than managing money – I’d call that financialresilience. The question of what makes for a happy life isone that has been pondered over throughout the historyof mankind. We have a huge amount of knowledge fromvarious sources, including academia, philosophy, psychology,neuroscience and theology.Over the past 150 years or so, the success of capitalism andthe resultant increases in standards of living have made moneya central point to our lives. Increasing life expectancy andchanges in family demographics means that we now have afuture that involves living independently, but without income.This means that financial planning has become increasinglyimportant to our wellbeing.Introduction to financial wellbeingFinancial wellbeing is therefore the study of these sources ofjoy in our lives, and the part that money plays in helping, orhindering, our wellbeing. We can break down this topic of howmoney affects our wellbeing into four areas:• The positive impact that is true of all of us.• The positive impact that is unique to each of us.• The negative impact that is true of all of us.• The negative impact that is unique to each of us.For example, having meaning and a purpose in our lives willbring anyone wellbeing. What that means for each of us,however, will be different.We also know that there are behaviours we all exhibitwhich lead to poor financial outcomes. The knowledge fromthe relatively new world of behavioural finance should beapplied to all aspects of financial decision-making, not justinvestment management.Then we each have our own self-limiting beliefs aboutmoney which have developed through our experiences.Understanding the research is therefore one step in applyingfinancial wellbeing theory. Understanding ourselves and howthis knowledge should be best applied to each client is theother step.The general truthsThere are five pillars of financial wellbeing that are true of allof us (note: all references on the sources of the research foranything mentioned in this article are in my books):• Having a clear path to identifiable objectives.72www.bluechipdigital.co.za

CLIENT ENGAGEMENT | Behavioural financeBLUECHIP• Control of our daily finances.• Having financial options.• Protection from financial shocks.• Clarity and security for those that weleave behind.Some of these – daily finances and financialshocks – constitute financial resilience.Some are more practical in nature. That clearpath, for example, could easily translate intocash-flow forecasting.Others are a little harder to pin down.Do we have more options as our financesgrow? Yes, to a point. If you have very little,then a roof over your head and somethingregular to eat will clearly increase wellbeing.The extent to which this continues aswealth grows, however, is much morequestionable. The answer to the questiondoes more money make you happier isyes, if you need money to be happy.If that extra money can buy you shelterand security, clearly it is going to makea difference. Once you reach the pointwhere more money is just buying biggerthings, or things bought just to showyou have money, then the additionalwellbeing is limited or even negative.Which brings us to those identifiableobjectives, something I feel is the keyto the relationship between moneyand happiness.Self-worthIf we gain our self-worth from externalsources, such as approval or status,then our self-worth is dependent onothers. If, on the other hand, self-worthcomes from internal sources, such asliving a life with meaning and purpose,then this is both more achievable andlonger lasting.Take that classic trope of wealth,the expensive car. A person whoseself-worth comes from external sourceswill drive an expensive car down thestreet and enjoy the admiring glances.However, this will only give them asense of self-worth if the glancescontinue. Once they have passed thatadmiring pedestrian, they need to findanother to drive past for their self-worth tobe nurtured.We each have ourown self-limitingbeliefs about money.A different person may buy thatexpensive car because they just love cars.Perhaps it is their hobby and love the carfor how it drives and how the car itselfmakes them feel.For a financial plan to help a person tobe happier not just wealthier, therefore,those identifiable objectives shouldinclude things that will bring the clientwellbeing. For me, this is the major shiftin the role of the financial planner; toboth educate clients, and to help themidentify objectives that will bring them joy.The whyWhen I wrote the original FinancialWellbeing Book back in 2015, I Googled theterm to make sure that nobody had usedit for the title for a book before. There weretwo results from that search. When IGoogled the term nine years later, therewere 320-million results.In 2021, Aegon UK undertook a surveyof many thousands of its customers,both direct consumers and advisors. Atotal of 72% of consumers said that theywanted advisors to discuss their lifeobjectives with them. However, only 32%of advisors thought that this is whatcustomers wanted.There are several reasons why adoptinga financial wellbeing-oriented approachto financial planning is becomingessential. The first is that the two statisticsabove show us that financial wellbeingis the direction of travel for financialadvice and planning.An upgrade to V3I think of financial advice as the provisionof guidance in relation to the technicalaspect of money, such as managinginvestments and tax planning. I think ofthis as version 1.Financial planning is version 2. Inaddition to technical advice, it adds cashflowforecasting. As well as looking at“now”, we are also looking to the future.Financial wellbeing is version 3. Itis an upgrade. In addition to technicalknowledge and future planning, itbrings two things: understanding andapplying knowledge on the relationshipwww.bluechipdigital.co.za73