The recent white paper on retirement reform has prompted many financial advisors to try and qualify / quantify their value proposition in order to substantiate their fees.   However financial advice is not a simple commodity, which can be compared, priced or substituted.  Financial advisors are paid for taking decisions on behalf of their clients and this is serious business; other than your health there is nothing more personal or important than your financial wellbeing.

The problem for financial advisors is that they operate in an environment, which is unpredictable, irrational and volatile from two dimensions.  I am referring to Mr. Client and Mr. Market.  It is no coincidence that Mr. Client and Mr. Market are both unpredictable and irrational since Mr. Market represents the collective action and behaviour of all the clients put together.    The problem for the financial advisor is Mr. Client wants to be part of the group.  This is referred to as herd mentality, individual investors would prefer to be wrong with everyone else than risk being wrong by themselves and this is only one of the many behavioural finance errors, which human beings are prone to when it comes to investing their own money.

As decision makers financial advisors face the daunting prospect of dealing with hindsight bias.  Hindsight bias refers to looking back into the past to understand and explain the outcome of a decision.  Hindsight is a perfect science, once you know the outcome the decision to arrive at that outcome seems obvious.   Investors will look back after the fact and hold financial advisors accountable for a poor decision, forgetting that the future was unknown when the decision was taken.   It always seems so obvious when one looks back.   In the same vain investors will fail to reward or acknowledge a good decision as hindsight makes it look obvious.

I sometimes get approached by youngsters thinking of a career in financial planning and I usually end up asking them if they have considered becoming a lion tamer instead, much less hazardous!

 

Mark Williams
Mcomm, CFP®, HdipTax
T. 021-851 3746
E. service@synfin.co.za

 

Middleman
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