What if we could give guidance that reflected the true importance of saving, minimalism (avoiding consumerism), compounding and low investment fees?  What if we didn’t have to sell / recommend / push products but rather could explain strategies that actually work for building wealth?

Or, to put it another way, what if we turned a financial adviser into a teacher?

That was 9 years ago when financial coaching was almost unheard of…

…a state of play that mostly continued until last week when financial coaching got a rare moment of attention in the Financial Times:

FT article on financial coaching…pretty fair overallhttps://t.co/zrzBEtSpKJ

— The Escape Artist (@TheEscapeART1ST) June 7, 2023

What’s the problem?

The problem starts with the “advice gap”, the gap between what financial advisers make money from (selling more products and charging fees that are a % of your pot) and what people really need (more guidance plus low cost, efficient investment vehicles).

The advice gap was first identified by regulators: The Financial Conduct Authority (FCA) and its predecessors.

Regulation and compliance are costly and the costs must be recouped from the client. As the article rightly says: “Advisers are not paid to deliver social policy. They are running businesses.”

It should go without saying that many regulated financial advisers / planners do good work. The problem mostly lies not in the people but in the economics.

Show me the incentives…

The problem comes from bad incentives. As Charlie Munger says: “show me the incentives and I will show you the outcome”.

The economic incentives for advisers are to:

1) focus on High Net Worth (and high spending) people

2) gather funds under management

3) retain the knowledge & understanding

4) emphasise complexity

5) downplay the impact of % fees

Couple this with the fact that traditional investing platforms / pension providers often make fees obscure and hard to quantify in actual £/€/$. Because the customer doesn’t hand over cash or a credit card, they never feel the pain.  The fees are silently and remorselessly deducted from their pot.  You don’t miss what you never had.

The differences between regulated advice and financial coaching

Financial coaching & guidance (when done well) compares options for what you could do and involves discussing pros and cons of alternatives.

Regulated financial advice should provide specific recommendations…it should be tailored to the client’s specific needs and tell you what you should do.

Information products (books, blogs and subscription services like mine etc) can give clear guidance but are not tailored to any one person.  And this is fine because most of us have similar personal finance challenges (e.g. earn more, save more, get better returns).

There is a synergy between info products and coaching. Many people learn fastest by discussion and Q&A. A conversation with a real person can save a ton of self-directed research. It can have the magical effect of overcoming paralysis by analysis.

Financial firms must navigate the legal boundary between advice (which is regulated) and guidance or coaching (which isn’t). But, as the article says, the public generally doesn’t care too much about these semantics…people just want help.

What could possibly go wrong?

There is a good reason why financial coaching started with ex-advisers (or as an adjunct to a regulated advisory business): because people who have been regulated know the rules. Working in corporate finance, I had been regulated by the FCA and registered as a “fit and proper person

The article rightly points out the potential for abuse from unregulated influencers on Youtube, Instagram and Tik-Tok who decide to dabble in a bit of financial coaching.

Yes the 20-something year old coaches on Youtube & Tik-Tok will blow themselves and their followers up at some point…that much is obvious.

I see a related problem on Youtube every day (the ads are a complete nightmare). The algorithm knows I’m interested in financial freedom so it sends me adverts for unregulated courses / webinars / seminars on trading FX, options, meme stocks, property development and all the rest of it. People are attracted to what seems easy.

They are all awful. They are based on the lie that the average person can be taught a magic system for making money off the institutions that dominate the financial markets.  Why do people think they have an edge that will allow them to beat Goldman Sachs, JP Morgan etc?

Here’s a clue to tell if a trading course works or not: if it’s advertised, it doesn’t work.  If it worked, the trader would protect their system as fiercely as Coca-Cola guards its recipe.

How I got started 

Before I first started doing financial coaching about 9 years ago, I did my homework. 

I talked to some wealth managers and got offered a role by one of the largest, most profitable firms.  They were (are) a fearsome marketing machine. I was struck by their understanding of human psychology…the problem was that they used that knowledge to take 2.4% of the clients money each year. I would like to say everything has changed since then…but it hasn’t.

This got me thinking that there must be a better, lower cost alternative that was legal & ethical.

I started doing some research. I could see that, although it was rare, some well-qualified people were doing financial coaching on a flat fee basis.

I contacted the Financial Conduct Authority. I downloaded the rules for myself and read them carefully. I took this seriously. Working in corporate finance, I had been regulated by the FCA and registered as a “fit and proper person”. 

I spent over 20 years as a financial adviser…not a personal financial adviser selling insurance and funds etc… but a corporate finance adviser providing independent advice to companies, banks, hedge funds and even governments (both UK & EU) in the context of mergers & acquisitions, fundraisings and restructurings.

This did not stop several people telling me that financial coaching it was impossible / illegal.  I’m no Elon Musk but any form of new venture involves doing something that other people will tell you is impossible. People will come up with any number of plausible-sounding reasons why you can’t do it.

But I took the plunge. And pretty quickly I realised there was a demand there as long as people trusted you (earning trust on the internet is hard work!).  My first coaching client contacted me just days after I mentioned the idea on my website.

Teaching people to fish

Since then I have coached hundreds of people (including training a few new financial coaches).

Here is my guiding ethos as a teacher and financial coach…this is my mantra because it informs everything I do:

“I never try to sell you anything.  I don’t give product recommendations and I don’t take your money away to invest. You have to make your own decisions. In short, its about teaching people to “fish” rather than selling them fish.”

A teaching model encourages me to make complex things as clear and simple as possible (Ockham’s razor applies). My aim is to transfer knowledge to the client (thereby making myself redundant at some point!). The client retains agency and stays in control of their money.

People often find it as hard to save and invest as they do to lose weight…and this is partly due to conditioning. Coaching recognises the importance of mindset, values and beliefs around money. It recognises that people have blindspots and strong emotions around money. It recognises the importance of investor psychology and behavioural finance.

What have I learned?

Firstly, that the Advice Gap is real and driven by economic incentives. 

Second, that financial coaching is not for everyone (it’s more suited to intelligent people who want to be in control of their money). Nor is it an easy way for the coach to make money.

Third, that no one has a monopoly on “The Correct Way to do Personal Finance”. There is no “One True Church” (although there are common mistakes that are undeniably bad for your wealth!).

But financial coaching is here to stay because, when done well, it works and it deserves to exist in the world.

Barney

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If you’d like to discuss financial coaching, please set up an introductory call with me here.

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