Business

Peter McGahan: Making good financial decisions

In 1972, the Stanford marshmallow experiment by psychologist and professor Walter Mishel, showed the impact of immediate gratification.
In 1972, the Stanford marshmallow experiment by psychologist and professor Walter Mishel, showed the impact of immediate gratification. In 1972, the Stanford marshmallow experiment by psychologist and professor Walter Mishel, showed the impact of immediate gratification.

APATHY has always been the biggest risk to any investor or saver. I was once asked by an independent financial adviser (IFA) why I gave away all the tips and inside research so freely in columns.

I explained that I have never seen an IFA as competition. The more people see an IFA, the better off society will be.

My target competition was always apathy. That’s the customer who is intimidated by the ‘posh suit money chap’, or the customer who fears money or doesn’t understand it fully.

All can lead to apathy, and that apathy can be expensive.

That’s the customer who may not use an IFA, thinking instead to use an adviser who is tied to one company.

I can’t let St James’s place off the hook because of the poor quality of their products and services. But there are countless others who do not get a mention via Yodelar’s review site that go unnoticed.

The best athletes, business owners, entrepreneurs and parents have coaches. Of course, they do.

If we want the best for our people, we need the training and coaching. Surprisingly, we aren’t taught money at school and if we aren’t coached or at least exposed to money in our upbringing, I know it’s a hard subject to pick up on.

Research shows why we make our decisions, and convenience is often one of them.

Amazingly, 97 per cent of purchase decisions are abandoned because the service wasn’t convenient enough. It wasn’t the quality or standard, it was the convenience.

Immediate gratification can be very expensive indeed. Immediate gratification has been around for a while but has been exponential over the last 20 years.

At Christmas, we used to sit with a pen (not a highlighter as they weren’t around then), and ring what we wanted to watch.

With three channels, we had to work together to agree, and then we had to wait for that programme to come on.

Back in 1972, the Stanford marshmallow experiment by psychologist and professor Walter Mishel, showed the impact of immediate gratification.

Children were offered one marshmallow now, or two treats after a delayed period.

The dopamine rush for the marshmallow right now, meant that many were unable to delay gratification. Later, those who were shown to have delayed gratification, had better life outcomes across a range of measures.

Today, everything is ‘on demand’ everywhere, and while that has benefits in many ways, the psychological impacts are also very significant.

Take time to choose your IFA, your financial decisions, your ‘any’ decisions. Also, apply zero based thinking after you have made a decision. We often protect our mistakes to avoid the stress, but this isn’t good. Eat that frog (read that book) and deal with tough decisions straight away.

Zero based thinking asks of you: “Knowing what I now know, would I have made that decision”. If the answer is no, resolve to accept that and change it immediately.

Research from the Personal Finance Society shows clearly that customers of restricted advisers pay on average over 28 basis points in extra charges. Trust me, that the underperformance in the investments is off the scale.

Almost a third of customers who seek advice who completed an FT survey didn’t know if their adviser was independent or restricted.

I also interviewed someone for a role a few years ago. It was a senior role for an experienced person. They referred to a St James’s Place adviser as independent. I explained they weren’t. He said they were. He was convinced. How does the customer therefore know?

It is not only the competitiveness of the thousands of products out there that restricted advisers cannot have access to. It is also that there are completely different products out there that those advisers don’t even know about.

There is also a payment bias to consider. If an adviser is paid when a ‘sale’ takes place, a sale needs to take place. If you are asking for advice, you pay for the advice so ‘sales’ don’t take place.

In any event, you have a cupboard with financial products that may fall foul of the zero-based thinking above. Resolve to use an IFA to compare those as soon as is possible.

Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial question call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net