Holistic Financial Planning and Financial Biases

Holistic financial planning refers not only to the examination of the entire financial picture of a client but also an examination of the financial psychology or behavioral biases of our clients and their unique situations. Financial planning is more complex than simply plugging in the numbers and seeing where the math leads. We are complex, thinking and feeling, social creatures whose financial biases are often engrained in us through our family history, and our individual upbringing. We are all unique as well as uniquely situated in our families, communities, and workplaces. Our role as your wealth advisor is to take account of your financial, situational, and psychological information while crafting a financial plan specifically for you. Anything less will result in a plan that either cannot or, often, will not be followed by the client.

The Financial Piece

Obviously, financial data is important to a financial plan. How much a family earns, what they save, and what they spend are critical to the plan. Existing funding vehicles, like RRSP and TFSA accounts, as well as existing risk mitigation products, like life and critical illness insurance, give the wealth advisor an idea of what is currently being done to accomplish the client’s goals. Most clients know we will review their financial life. What they often do not realize is that the financial data is only one piece of the puzzle.

The Clients Situation

A second piece of the puzzle is a client’s situation. Situation is a broad term to indicate many things including family status, employment status, family wealth, age, stage of life, and family obligations, to name a few. Blended families are becoming more common which often leads to increased complexity. Every situation exerts a different but still important level of pressure on the client and what they need from a financial plan.

The Psychological Information

Arguably the most important information a wealth advisor must acquire is a deep understanding of the client’s financial psychology. We all grow up to have a particular view about finances that is unconscious and builds our financial biases which affect all aspects of our financial lives. Some people avoid thinking about money or dealing with it. Some people seek to acquire wealth for its own sake. Others simply want what money can buy, the status it can bring. And, for others, wealth is something to be stewarded and tends to be useful in times of need or opportunity.

In his 2011 best-selling book Thinking Fast & Slow Daniel Kahneman explains how people essentially have two separate thinking systems. System one is fast, instinctive, and emotional. System two is slower, more deliberative, and more logical. As wealth advisors, we are here to learn what mental shortcuts our clients are taking when thinking about money and help them navigate towards clear financial thinking. System one thinking without a balance of system two can lead to unintended consequences. Our role is to bring a healthy dose of system two thinking to our client's situations.

A Real-Life Example

All aspects of financial planning need to integrate the three information sets: financial, situational, and psychological. One real world example is helping our clients determine the best time to begin taking the Canada Pension Plan (CPP). We begin with financial information and seek to understand the tax considerations of taking pension income at different times. We look at whether there is sufficient income from earned or other pension sources, and we look at the implication on their portfolio. Though seemingly comprehensive the analysis falls far short of what is required if an examination of the client’s wider situation and financial psychology is not also included.

There are two common situations that we see impacting CPP decisions. The first is whether the client is married or single. This is significant because there is no true survivor benefit with CPP, the surviving spouse will only receive the maximum CPP a person is entitled to. The way this plays out is if a couple who are each entitled to a maximum pension at age 65 wait until age 65 to take their pension, then upon the first to die, that person’s pension goes away completely.

In contrast, if they both took their pensions early the surviving spouse’s pension will be topped up with a portion of the deceased spouse’s pension to the maximum that one person can receive at age 65. By taking CPP early they are reducing the draw on their investment portfolio, potentially preserving assets for the next generation. If a person defers their CPP income past age 65 they receive an increased benefit. On their death, the surviving spouse does not benefit from the deferral.

The other common situation we see impacting the decision on whether to take the CPP is how much wealth the family has. People without substantial non-registered investments are likely not worried about Old Age Security pension (OAS) claw back or preserving assets for the next generation. They are, however, very concerned about running out of money in retirement. CPP is a guaranteed, inflation adjusted, lifetime pension so alongside the OAS it forms the bedrock to retirement financial security. People with a higher need for safety and consistency over wealth accumulation and volatility will be more comfortable starting CPP when they retire to provide a consistent income stream. For others they may start taking CPP early as they have health concerns and fear they will not receive the full benefit they paid into. Other clients start taking CPP at age 60 because they are entitled to it.

The complexity of planning shows in the integration of the financial, situational, and psychological considerations of clients. We work with clients to create a plan that is as unique as they are. It considers their financial beliefs and behaviors but also seeks to temper those beliefs and modify those behaviors in service of achieving their stated goals with the financial resources they have available. With a plan agreed upon we provide coaching and guidance along the way. We do not believe in sending clients off to implement a plan on their own. We believe all clients deserve to reach their full potential and our role is to walk alongside them, adjust as required, and reach the finish line together.