Chris Gilchrist: False precision is the enemy of financial planning
By Chris Gilchrist
Most of the columns I have written for Money Marketing have been number free. I could have cited lots of numbers in support of whatever point I was making but this practice, which many still use, strikes me as old-fashioned.
If you present an argument that encourages readers to question the numbers, isn’t it better not to pre-select the evidence?
Unlike the days I began my career in financial journalism, the numbers are not buried in publications sitting on shelves so that you do the reader a favour by including them. On the contrary, almost all the numbers are easily accessible to everyone and it is not hard to work out which are more and which are less reliable.
How relevant is this to Adviceworld? Well, think about the numbers included in reports, analyses and cash flow illustrations.
In a publication like Money Marketing I can focus on the argument and expect readers to follow because we share a knowledge base. But we cannot assume that of clients. We need to make it easier for them to understand things by using graphics, illustrations and simplification.
There is a conflict between communicating effectively through simplification and being precisely accurate. Yet regulations and their interpretation by compliance geeks tend to mean that precision, however spurious, wins out at the expense of comprehension.
The new Kiids are a case in point. The numbers they contain are precise but they are also fundamentally misleading because the methodology is flawed.
Warren Buffett’s principle, “It is better to be approximately right than precisely wrong” is not applicable in every field. You would not want air traffic controllers or brain surgeons thinking like that. But it does apply to financial planning because almost every aspect of a financial plan is provisional and subject to revision.
After all, a financial plan is constructed not to serve financial goals but life goals and objectives. The proportion of clients that arrive at advisers with precise and clear goals is vanishingly small. With our help, they can define them more clearly but they will remain (as, in most cases, they should be) fuzzy.
False precision in relation to fuzzy goals bakes an unsatisfactory cake.
There is an elusive balance between using approximate pictures to describe the journey and precise numbers to underpin the analysis and recommendations. I do not think there is a right way to do this, since firms ought to tailor their communications to their clients, and we know some clients handle pictures better than words and vice versa.
So, the last thing we need is more top-down regulatory prescription about suitability reports. Let them be tested in the real world (client feedback is essential) and – where necessary – by the Financial Ombudsman Service.
Chris Gilchrist is director of Fiveways Financial Planning