Financial plans are in their simplest description a model of the future as related to the money parts of our life. The key is that they are a model. They are not fact. They may not even be close to reality.
You and I both need to recognize that reality exists independently of us and what we rely upon is our interpretation of that reality and that interpretation is based on our beliefs.
To some extent our beliefs are conditioned by experience, family, friends, colleagues, culture and society at large. They are unique to us, both personal and subjective. Once formed they are difficult to change by argument, logic or reason. It has been said that no one ever changes their world view by reasoning. Most beliefs have an emotional part.
Clients and advisers both need to notice that the brain is a superb pattern finding mechanism. It will find patterns in meaningful information and it will find it in meaningless information. Worse it will infuse patterns with meaning, intention and agency.
Once these patterns are formed the brain seeks confirmation.
For the adviser it is not enough to know what a client believes, the adviser must also know how the client came to hold the belief. If you know how the belief came to be, you can address it from the same place as its formation and have a hope of connecting it to a more current reality.
For example, a client says that life insurance is a bad investment. Reason will not change that view without more. From further discussion, you determine that he has accepted this reality based on his father’s belief delivered in 1954. You can easily agree with him and point out that his father was likely right, “based on what was true in 1954.” Today however, these things have changed. People live longer – mortality cost in insurance today is less than 20% of what it was then. Costs to operate the insurance business are a tiny fraction of 1954. No more acres of clerks with pencils. Policies are more flexible. Insurers can invest reserves more aggressively so can return more. And so on. The old belief remains true and it connects to current reality.
In financial plans reality is there but it has been conditioned by both the client and the adviser. The model is probably a better description of how they think than it is of objective reality. Fortunately there is a defense.
The defense is frequent examination of perceived reality, review of the plan’s connection thereto and revision to meet more evolved needs and circumstances.
Conscientiously applied, this technique will tend to cull misconceptions and delusional beliefs and retain the objective reality that surrounds the situation. A financial plan is never finished.
Advisers: Perform regular reviews.
Clients: Actively participate.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
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