What constitutes sound financial advice?

What constitutes sound financial advice?

It is impossible to determine the ideal portfolio for the upcoming three decades. But with the facts that are readily available, we now understand what investing strategies work and, more crucially, don’t work. The need for expert financial guidance still exists even though low-cost funds are universally recognised as a very wise investment decision for the majority of investors.

This is why.

Recognising poor financial advice

It’s crucial to first understand what constitutes bad financial advice. In our opinion, poor financial advice occurs because of:

Ignoring the evidence: Academic research dating back decades shows that attempting to exceed the market index is a losing endeavour. Financial consultancy in the past frequently concentrated on choosing investments, which produced poor results. Any financial advice that emphasises ‘beating the market’ or ‘chasing what’s hot’ should be disregarded given the overwhelming evidence against stock picking and in favour of low-cost funds.

Experts can’t accurately forecast the future: Financial experts may be skilled at determining base rates (known probabilities) but attempts to forecast the performance of fund managers or stocks over the long term are uncertain (in fact, data shows that a sisable portion of active fund managers and individual stocks underperform the market). Neglecting this could have disastrous effects on your financial journey. Avoid anyone who sells this material under the guise of financial advice.

We make both cognitive and emotional mistakes. People who are adept at selling and likeable have our trust, but we don’t trust those who tell us unpleasant things. It is very difficult to make wise financial decisions because of our inherent biases.

Good financial advice—what is it?

Expert financial advice can be categorised into five main categories, in our opinion. They combine their technical expertise in financial planning with their understanding of human psychology.

These are them, in the following order:

Health

Setting and quantifying goals

Allocating assets

The necessity for insurance and financial products

Tax awareness

1. Health, setting goals, and quantification
Good advisors are aware that wealth is merely a stop on the path to happiness. To satisfy their clients’ wants, wellbeing advisers help them examine their desires, balance them, and stay away from emotional and cognitive blunders. And the complete range of benefits—utilitarian, expressive, and emotional—satisfy these desires.

When used in a financial context, well-being typically refers to financial well-being. Discussions about improving wellbeing frequently centre on improving financial wellbeing, such as saving money while we are still working to support us in retirement.

But well-being goes beyond financial security, and improving well-being entails more than just improving the money component. The domains of well-being go beyond money to encompass things like family, friends, and communities; jobs and activities; and physical and mental health. However, financial well-being is the foundation of overall well-being and is necessary for overall well-being in every domain.

Understanding the driving forces behind your investment choices is essential for success in life. Why you.

Having financial objectives has a big impact on many different areas of our lives. It affects how we manage our time, pick our relationships, pick our occupations, manage our finances, spend our money, and make investments. In other words, we deploy all our resources, not just financial ones, based on our financial goals.

Although it can seem obvious, it can be difficult to define goals that will lead to a meaningful and rewarding existence.

Think about the situation when you set a lofty financial objective, like early retirement, and make considerable sacrifices or take unwarranted risks to achieve it. However, you might find that achieving that objective doesn’t result in the happiness you were hoping for in the future.

We now come to the idea of hedonic adaptation.

Hedonistic adaptation is the term for our capacity to quickly adjust to both favourable and unfavourable new conditions. According to studies like those of lottery winners and accident victims: Is happiness relative? People frequently revert to their pre-event levels of happiness or despair. As a result, the appeal of early retirement, material things, or lavish experiences might not have a long-lasting effect on general well-being.

Goal setting therefore becomes essential in financial coaching and should be the first topic covered.

There is a substantial corpus of research on happiness and life satisfaction, just like there is on investing. The ultimate objective of every investor (and person) is to live a meaningful life, so financial consultants should be knowledgeable about what that entails.

Without carefully examining the aim, creating a mathematical plan to attain it can result in the incorrect allocation of capital.

The notion that psychological knowledge is necessary for providing financial advice may also appear out of the ordinary. But since money is so closely entwined with our lives, financial choices have a big psychological impact.

The next step in financial consultancy is quantifying those goals once they have been determined and are in line with a fulfilling existence. This could include basic or complex computations, depending on the objective and situation. We can avoid slipping into the hedonic trap of an endless quest for more by quantifying our aspirations. To avoid feeling regret, it’s essential to comprehend what.

In contrast to the desire for more, the pursuit of enough is far more difficult to understand. It may feel good to speculate on the stock market in search of more, but it takes much more mental effort to stand back and consider what enough really means. The hardest financial skill, is understanding when to quit changing the goalposts and realising that insatiable drives for more frequently result in regret.

So, the first step is essential. Investors who are conscious of the psychological underpinnings of goal setting and the pursuit of enough can better align their financial choices with a fulfilling life and avoid the traps of unrelenting unhappiness.

2. Allocation of assets
After you have identified and quantified your important objectives, the next step is to think about asset allocation. Considering your objectives and their projected costs, how should you distribute your financial resources? Investors should choose the appropriate mix of stocks, fixed income bonds, and other asset classes before even considering whether low cost funds are the best option. Making judgements about asset allocation also requires taking into consideration any debt you may have.

Making these selections in a vacuum is not sufficient; they also need to be grounded in worthwhile objectives and consider your unique situation and capabilities.

For instance, compared to a commissioned salesperson in a volatile business, a tenured professor’s income is substantially more stable. When allocating financial assets, these variations are significant.

One of the most significant factors affecting predicted investment results is asset allocation.

For instance, choosing a riskier investment portfolio that guarantees a higher return on investment can help you get closer to your goals faster and require fewer additional funds. This strategy, meanwhile, might also increase uncertainty and be harder to stick with during times of market turbulence.

The implied cost of choosing an asset allocation that is too cautious can also be higher due to lower expected returns.

You’ve established specific, quantified goals that are relevant. To achieve the objectives, an asset allocation has been chosen, taking non-financial assets, such as human capital, into account as well.

However, a gap still exists.

3. Needs for insurance
You probably rely on your own human capital or the human capital of someone else in your life to advance towards reaching your financial goals unless you are already financially independent.

An early death or an unexpected illness can quickly derail even the best-laid investment plans. Though they may not be the most enjoyable topics to discuss, life and critical illness insurance are some of the most crucial elements of a financial strategy.

Determining insurance requirements can be straightforward or complex, like quantifying a goal, depending on the situation. Another important piece of financial advice is to comprehend the necessity for insurance and the expense of providing it.

4. Financial products
We can only begin to think about financial products (such as low cost funds) after considering objectives, asset allocation, and insurance requirements.

Although it requires technical expertise, evaluating the best financial products to accomplish goals and implement asset allocation and insurance plans is impossible without the context provided by a larger plan.

Financial advice too frequently begins with the product. This is unwise financial consultancy. Run away from your meeting with a potential advisor if it starts this way. There’s a good reason why this is listed at number 4.

5. Tax sensitivity
Taxes, of course, hang over all the above. Taxes should be considered at every stage because doing so will increase expected results while lowering risk. Another area where both technical knowledge and comprehension of the context are essential is this one.

Why not attempt it alone?

The process of defining your purpose, setting your priorities, and implementing your tactics: the very final step is strategies, such as low cost funds.

Iteration underlies the existence of the entire system. Objectives, preferences, and values vary as people age and go through various stages of life. Wealth management is an ongoing process of progress.

Why then don’t you just follow us on LinkedIn, Twitter or Instagram and subscribe to our blog? After all, there is information available, and it is all free.

Unfortunately, biases plague us as humans. Maybe you have confirmation bias, which is the propensity to form an opinion quickly and then look for evidence to support it. Or maybe you think decisions are binary when they aren’t. Perhaps you tend to be overconfident, believing you know more than you do, or you let your short-term emotions get in the way of making wise judgements.

It is true that not everyone requires an expert financial consultant.

However, the issue is that the information in front of us, including our personal prejudices, is what prevents us from making reasonable financial decisions.

One of the best ways to avoid this is to have a wise professional verify your ideas, especially in difficult areas like wealth management.

A strong justification for financial consultancy is the ability to make decisions with a fresh perspective.

Why do people ask for guidance?

Hereafter three reasons why people go for professional consultancy:

1. People can assess financial opportunities and trade-offs rapidly with expert help. With the help of an expert, going through the processes produces a connection where there is a shared knowledge of objectives, preferences, and values.

Decisions about these trade-offs are more effectively made when there is mutual understanding, technical proficiency, and awareness of human behaviour.

  • Should you take on a larger mortgage to purchase a larger home?
  • Should you accept a job that pays less so you can spend more time with your children?
  • Should you sell the company stock you currently own?

Every day, financial trade-offs are presented.

Expert guidance reduces complexity. It might be challenging to assess the relative importance of the information available online, which numbers of thousands of pages, for a given decision. Experts can rapidly evaluate information’s validity and value, simplifying the decision-making process by lowering the amount of input needed. Decision paralysis brought on by an abundance of information and a sense of complexity can be time-consuming and stressful.

2. Professional guidance boosts confidence in a proposed course of action. Studies have indicated that those who have visited with a financial consultant have enhanced financial and emotional well-being, and people want to make sure they haven’t missed anything. They frequently feel more capable of achieving their objectives and handling disappointments without having to make financial compromises.

3. Professional guidance saves time. This can be done in plain sight by cutting back on time spent on initial research and doing away with ongoing duties needed to achieve a financial strategy, for example. But also in less obvious ways, such as cutting down on idle time and stress-related time spent worrying about carrying out the plan.

Conclusion

Choosing the best fund managers or stocks is not the focus of financial advice. Financial advice is still necessary, even though, for most expat investors, low cost funds represent the most reasonable investment option.

Setting up specific objectives and then measuring them is the first step in giving financial guidance. Choosing the right asset allocation and insurance strategy comes next. You shouldn’t think about specific financial products or strategies until you’ve thought about these considerations and kept taxes in mind.

With enough knowledge, it is possible to do these tasks, but people frequently become mired in their own perspective. This may result in limited viewpoints, confirmation bias, fleeting emotions, and overconfidence, all of which can seriously impair the ability to make decisions.

Seeking professional advice might make this easier to overcome. A specialist can help you achieve your unique goals, preferences, and values while also optimising trade-offs, reducing complexity, and saving time.

Every day, we advise expat clients to invest in low cost funds, but we also recommend a variety of additional actions based on our more than 88,000 hours of work experience and understanding of how people think.

Contact us if you’d like assistance weighing trade-offs, reducing complexity, or gaining time.