Part 1: The feeling of financial self confidence
What is financial confidence and why is it important?
Financial confidence can be summed up as a feeling of being ‘in control’ of all aspects of your financial landscape. It can only really be obtained when you have reached certain financial milestones and taken certain financial actions, such as optimising your tax position and saving enough to provide for a comfortable long term future. Though financial confidence is borne out of financial security it’s not automatic because it is also about having a certain psychological attitude to your finances. We work with some objectively wealthy people, financially very secure, who still struggle with financial confidence.
Key indicators: The ability to make strategic financial decisions with clarity and control. Strong core knowledge and a feeling of competence. Minimal anxiety around finances and financial decisions
Why financial confidence is threatened after separation
Separation can be an extremely unsettling experience, emotionally challenging and financially de-stabilising. It can lead to:
- Uncertainty about financial settlements
- De-stabilisation of long-term financial prospects
- A lack of clarity about/or change in long term financial goals
- An acute lack of confidence if your finances were managed more by your partner than by yourself
- More complex financial portfolios which are harder to manage
- Complex wealth transfers and settlement agreement implementation to undertake
Taking insights from Psychological research and applying them to finances we arrive at four core building blocks of financial self-confidence:
1. Financial Self-Efficacy
a) What is it & why is it important?
Financial self-efficacy is your perceived ability to manage money and make effective financial decisions around specifics like budgeting, investing, or managing debt. It is strongly correlated with levels of financial knowledge and is impacted by the type of reinforcement you’ve obtained from previous decisions. If you have been criticised for your decision making or, for example, have lost money investing, your financial self-efficacy may have been diminished. High financial self-efficacy elevates your resilience and reduces anxiety around financial management.
b) Actions you can take to elevate financial self-efficacy
- Improve your levels of financial knowledge through courses, books, or webinars
- Obtain support from a professional advisor
- Set realistic short-term goals and review them regularly to obtain positive reinforcement
- Consult with a financial planner to demystify complicated financial topics, check decisions and provide positive affirmation of your actions
*Reference:
Bandura, A. (1997). Self-efficacy: The Exercise of Control. New York: W.H. Freeman.
2. Financial Self-Esteem
a) What is it & why is it important?
Financial self-esteem relates to your feelings of self-worth in financial matters. Someone with high financial self-esteem feels worthy of wealth and success, enabling them to make decisions with less self-doubt. When you trust your financial abilities, you’re more likely to make confident, decisive money management choices. Without this, fear of mistakes can lead to indecision or avoidance, harming your financial position, which leads to further diminishment of your financial self-esteem.
b) Actions you can take to increase financial self-esteem
- Celebrate financial milestones, no matter how small
- Try to avoid comparing your financial situation with others
- Outsource responsibility to a professional advisor (to mitigate low esteem)
- Establish a sound long-term financial strategy to provide a sense of stability and avoid ‘second guessing.’
*Reference:
Rosenberg, M. (1965). Society and the Adolescent Self-Image. Princeton, NJ: Princeton University Press.
3. Positive Financial Social Influence
a) What is it & why is it important?
In Psychology social influence refers to the influence of other people on individuals. In a financial context it is important to realise the profound effect that others can have on our financial behaviour. Social media makes this more relevant today than ever before. There are so many self-proclaimed financial experts eager to tell you where to invest, how to invest, what to do, what not to do. Many of them are unqualified to offer advice yet widely influence behaviour. If your financial self-efficacy or self-esteem is low, it is important to recognise your own vulnerability and to choose the people you surround yourself with very wisely.
b) Actions you can take to enable positive social influence
- Engage experienced professionals. Financial planners/advisors, accountants, and legal advisors
- Seek recommendations from trusted individuals that you know have successfully managed their finances
- Join credible financial education communities or attend industry leading wealth-building seminars
- Avoid taking financial advice from unqualified sources
*Reference:
Cialdini, R.B. (2001). Influence: Science and Practice. 5th ed. Boston: Allyn & Bacon.
4. A Growth Orientated Financial Mindset
a) What is it & why is it important?
Your financial mindset determines how you approach money, investments, and long-term wealth management. It reflects your attitudes, beliefs, and thought patterns about finances, influencing how you react to opportunities, setbacks, and how you make financial decisions over time. Someone with a growth-oriented financial mindset might see market dips as investment opportunities, while someone with a fixed financial mindset may panic and withdraw funds prematurely. A growth-oriented mindset is also associated with a belief that financial skills can be learned, improved, and refined. Someone with a growth orientated mindset would learn from their mistakes and adapt to changing financial conditions.
b) Actions you can take to re-orientate your mindset
- Commit to continuous learning
- Engage with a professional advisor who keeps you ‘in the loop.’ One who empowers, educates and encourages a long-term perspective
- Revisit your financial plan regularly and readjust if prudent
- Focus on long-term financial goals rather than short-term market fluctuations
*Reference:
Dweck, C.S. (2006). Mindset: The New Psychology of Success. New York: Random House.
Two key actions emerge to increase financial self-confidence
Action 1: Elevate your financial knowledge
It’s impossible to provide an exhaustive list, it will depend on the nuances of your specific situation but here are the five areas of financial knowledge which are crucial to grasp, during and after separation.
Understand risk & reward
- You don’t need to have a degree in investment markets but knowing the main asset classes, the importance of appropriate diversification and the inherent risks of different types of investments is incredibly important. This ensures that you are appropriately invested in line with your ‘tolerance to risk’ and can maintain investment strategies during inevitable downturns without panicking
Have a grasp on Financial products and investment solutions
- Know the main onshore and offshore tax-wrappers and how they can work together to provide a strong tax-efficient portfolio
- Understanding how investment solutions are ‘packaged’ and delivered, including ethical investing versus socially responsible investing etc
Think ‘Long term’
- Understand the value of cash flow forecasting to ensure financial actions align with long–term goals
- Use cash flow forecasting to project your current financial situation into the future in order to identify areas of financial weakness and/or to provide reassurance
- If decisions around settlements need to be made, use cash flow forecasting to run ‘what if’ scenarios to ensure prudent long-term decisions are being made e.g. keeping the house v pension offset
Mitigate tax efficiently
- Understand how tax works. All the ways you pay it, when you become liable and how you can legitimately manage your business and personal tax affairs as efficiently as possible
- Simplicity is best when it comes to mitigating tax. Make sure you have used up all your allowances. Ensure you are not paying more tax than you should be and take advantage of current government incentives where appropriate
How to use your portfolio to support your lifestyle
- Relying on your assets to meet your day-to-day expenses requires knowing how much you are spending (or want to spend) and identifying where to best draw this from, tax-efficiently and practically-speaking
- This often means having multiple sources, each with different tax rules and having a known approach to match your annual spending with the income you get from all of your sources
Action 2: Employ a professional
The other way to short cut financial confidence is to take advice from a professional. Handing over the management of your wealth to the right professional SHOULD alleviate any lack of confidence.
How do I find the right advisor!?
Choosing a financial advisor isn’t just about finding someone who can crunch numbers, analyse market trends, or draft a budget. You’re potentially forming a relationship that could last a lifetime and the difference between the right advisor and the wrong advisor can be profound. So what are your key considerations?
Emotional compatibility
Your financial advisor is someone you’ll need to share your financial secrets with – spending habits, guilty pleasures and financial aspirations. During your initial consultation, ask yourself, “Do I feel understood? Do I feel judged? Can I see myself opening up to this person?” “Do I like them?” Your answers will give you a good indication as to whether this individual is right for you.
If you find yourself ‘inheriting’ an ex-partners advisor you should know that, in the US, 40% of women change advisors post separation. 70% change advisors post bereavement. If you gel with your current advisor, then why change, but if you’re not so sure then it might pay to re-evaluate.
Shared philosophy
You’re entrusting your financial wellbeing to this person, it’s essential to find someone whose financial philosophy aligns with yours. Some advisors take a very traditional, numbers-first approach, concerning themselves almost extensively with financial products. If you are just starting out, are not in the midst of a pivotal life experience like divorce and just have some spare income that you want to start saving or investing, then this approach can work well. If you have more financial complexity, possibly brought about by a pivotal life experience like divorce, and are keen obtain long term financial freedom, an advisor offering more bespoke financial planning would suit you better. Make sure you and your advisor see eye-to-eye on these foundational philosophies.
Qualification
While personal compatibility is crucial, you must also select an advisor with the appropriate level of qualification. The most highly qualified financial advisors are Chartered Financial Planners or Certified Financial Planners (CFP). These qualifications ensure a firm knowledge base and skill level. Other qualifications, even if they are made to sound eminently impressive, are not equivalent and only around 25% of financial advisors have this level of qualification. There are some capable advisors who don’t have this level of qualification, but why would you want to settle for anything less than the most qualified professional given that you’re entrusting them with your financial future.
Approach
There is a debate within financial planning around the use of cash flow modelling. Naysayer’s suggest it is unnecessary, that because cash flow forecasts are based on assumptions which are inherently imprecise they are not worth doing. Proponents (and we are among them) suggest it’s impossible to make effective financial decisions without a mechanism to measure the long-term implications of that decision. Cash flow planning enables an invaluable side-by-side comparison of two or more actions so that you can establish with a high level of certainty which action will result in a superior financial outcome. This is particularly important if you are weighing difficult decisions during separation, such as keeping your family residence v pension offsetting v retaining interests in a business.
Independence
Most financial advisory businesses tout themselves as ‘independent.’ But be careful, some are more independent than others. Some of the bigger companies are what’s called ‘vertically integrated.’ This means that their company has their own range of products like ISAs and pensions, their own brand of investment solutions, a discretionary investment management team and advisory services. They often market this as a unique selling point, but it arguably erodes their independence. They can be under managerial pressure to recommend certain products and sometimes they are financially incentivised to recommend their own company’s products and services over more suitable products from the wider marketplace. Does that sound independent to you?
Truly independent financial advisors, as well as being open to new ideas, approaches and innovative products, have access to the ‘whole market.’ They will seek out the best investment solutions for each individual client according to their specific needs and aren’t pressured or incentivised to pick one product over another.
Transparency
Openness and honesty is important in any professional relationship, but essential in one which involves your financial future. Transparency around fees is particularly important and they are often frustratingly opaque. Despite very clear regulation and guidance around fee disclosure, most financial advisory businesses do not publish their fee structures and they often have complex fee models which you’d need an excel spreadsheet and degree in maths to figure out.
As well as the fee for onboarding you as a client, remaining a client also means paying an ongoing fee. This normally comes from the portfolio rather than your own cashflow (which makes pretty good sense). Most firms also have the audacity to charge an additional onboarding fee for additional investments or other transactions throughout the year, and one or two high profile firms even have penalties for withdrawing your own money from your portfolio. Demand clarity around costs in order that you can effectively compare advisors and ensure their pricing model meets your needs. Be careful and scrutinize the small print.
Final thoughts
Choosing a financial planner is a significant decision that requires thorough research and introspection. By prioritising emotional compatibility, shared philosophy, and transparent communication, you set the stage for a mutually beneficial, long-lasting relationship. Remember, this is not just about money; it’s about living a purposeful life, feeling financially secure, and knowing that you have a trustworthy partner to guide you.
