17 Sep 2020

Wealth and happiness – a health check with your financial physician

Alexandra Nortier

National Wealth Management Joint Head, Investec Wealth & Investment

Can wealth make you happier? With the guidance of a financial physician, your wealth can not only be preserved and grown, but in a way that offers fulfilment too.

Money, happiness & true wealth - a three-part film series

Part 1: The Financial Physician

"I would venture that in today’s complex world, the role of the wealth manager has evolved to that of both a financial physician and indeed, often a psychologist."


Part 2: The behavioural condition and making money last over generations

"Research has found that humans tend to suffer the pain of a loss almost double than the pleasure of an equal gain. Our human brain, with its emotional and cognitive biases, leads us often towards making inferior financial decisions."


"Research has found that humans tend to suffer the pain of a loss almost double than the pleasure of an equal gain. Our human brain, with its emotional and cognitive biases, leads us often towards making inferior financial decisions."


Part 3: The paradox of happiness

"Above a certain level of income, there is no direct increase in the level of emotional happiness. The foundation of this assumption is that once a human's basic or perceived needs are met, the further accumulation of material gains does not necessarily bring with it the expected increased happiness."


The term wealth is often used interchangeably with money. In fact, many dictionaries define wealth as the value of accumulated assets. However if we dig deeper into the etymology of the word “wealth”, we discover that its Middle English origin is in fact wellbeing, or the welfare of people and their general happiness and joy.

 

Most people’s understanding of the role of a wealth manager is someone who looks after clients’ investments and money. The reality is that our role extends far further. Just as important is helping people achieve a deeper understanding of how, through their emotional reactions, they behave towards money, and how we guard them against these innately human tendencies to panic.

 

Our role is to show you how you can better structure your affairs in order to pass on a legacy for future generations. Ultimately we aim to show how financial resources can bring true happiness by maximising the potential of your investments. 

Enter the financial physician

Expanding on this, I would venture that in today’s complex world, the role of the wealth manager has evolved to that of both a financial physician and indeed, often a psychologist.

 

The need for this role in the time of Covid-19 has become even more apparent. South Africans are currently more concerned about the financial impact of Covid-19 on their lives than they are of catching the virus itself.

 

Good financial health however, is generally not achieved in a crisis like a pandemic. It is preferable to have a long standing and trusted relationship with your financial physician, so that when a crisis strikes, you are suitably financially positioned and emotionally resilient to handle the challenges.

 

Like a normal physician, a similar process is involved, including the diagnosis and prescription. However what really matters, is to entrench the right healthy behaviours that serve over a lifetime and for future generations.

 

Let’s go through each of these.

The initial diagnosis

Every family or person has a unique set of circumstances (or symptoms), so it’s crucial to get this initial diagnosis correct. Whatever stage of life you’re at, a financial physician’s role is to guide you through the opportunities or difficulties you face.

 

Clients often want to know whether they are at the end of the road in terms of their accumulation of funds or if instead they should continue to work. Some people want reassurance that their money will last if they live to 100. Others might want their money to provide for the next three generations.

 

Identifying people in transition is another common diagnosis whether it be divorce, death or retirement. Many want to rule from the grave. And while we are very good at our roles, our mandate does not stretch to the afterlife.

 

This initial diagnosis needs to be updated with regular check-ups at least a couple of times a year to make sure that the family or person stays on course and to adapt to any changes they might occur. 

The prescription

A good prescription after the initial meeting will blend together a compound of core investments. This could include traditional asset classes such as equities, bonds, property and cash. These may need to be supplemented, depending on the symptoms, with some private equity or alternative investment classes.

 

These are mixed together in the appropriate amounts that provide a solution for the particular challenge or life aspiration that your family may have.

 

We live in a world of information abundance and while this comes with amazing benefits, the reality is that people are drowning in information. This pandemic has taken us to new levels of information overload, fake news, trump news, some real news, is that real news.

 

Financial physicians should be able to distil, translate and help their clients based on extensive research and deliver real accurate up to date information. 

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The behavioural condition

Daniel Kahneman won a Nobel Prize for his analysis on the inner workings of the human brain and it is in this field where we find that psychology, not finance, is one of the most important factors in achieving clients’ long-term financial objectives.

 

Research has found that humans tend to suffer the pain of a loss almost double than the pleasure of an equal gain. Our human brain, with its emotional and cognitive biases, leads us often towards making inferior financial decisions.

 

Although events such as Covid-19 have undesirable consequences, the markets have previously recovered every time. To quote Sir John Templeton, the four most expensive words in the English language are “this time it’s different”.

 

In the Global Financial Crisis, the peak to trough fall was 56% and the S&P 500 took 2.8 years to recover. Black Monday in 1987 saw a fall of 28.5% and the recovery took just over a year.

 

Despite these reassuring statistics, from the beginning of this crisis to now, we have seen extremely high levels of cash withdrawn and presumably hoarded in safes and under mattresses. One has to question, why do we humans often react so irrationally?

 

To explain, let’s go back thousands of years. We have a very old brain – roughly 200,000 years old. But financial markets have only been around for roughly 400 years so we seem to revert to our ancient and embedded patterns when making financial decisions.

 

Research has shown that we use the same parts of the brain for processing information about financial risk taking that we did in our past to avoid attacks from predators.

 

Our brains are wired for flight or fight. Over thousands of years the evolution of Homo sapiens have favoured those with the wherewithal to attack opportunity and flee from danger. However, financial markets require patience and investing over the long term. 

This irrational human behaviour is expensive. Meir Statman, one of the world’s leading behavioural scientists, shows that the heaviest traders lose 4% of their account value each year due to trading costs and poor timing.

 

A study by Vanguard shows that impulsive behaviour over a 10-year period spanning the Global Financial Crisis cost investors about 2.5% a year.

 

When markets rise, we feel calm, excited and secure and we are inclined to invest more. When markets fall, we become insecure and we worry that they will continue to fall and so we stay away from further investing.

 

READ MORE: Howard Marks on investing: Finding rhyme in reason

 

As markets advanced in the middle of the last decade in the US, investors placed about US$660bn of new assets into the US equity mutual funds. During and after the crash, they withdrew more than US$500bn, missing out on what was one of the best buying opportunities in history.

 

There is an abundance of statistics which demonstrate this behavioural gap and it has been repeatedly proven that individuals who work with wealth managers or sophisticated “financial physicians” have far better financial outcomes. Our role is increasingly to advise our clients that their behaviour may be ill-advised and to encourage them to stay the course. 

Making money last over generations

Statistically, 70% of wealth is lost over two generations, and 90% over three. The main reason for this is not having a proper financial plan, as prescribed by a respected adviser. This plan should aim to keep the wealth invested over time in the correct mix of inflation-beating investments that meet a family’s goals and needs.

 

A second reason for this loss is a lack of proper structuring and estate planning. This is an area where a good financial physician must have at least a basic understanding of the underlying mechanics of structuring your financial plan and should know when to defer to an expert.

 

Our clients are becoming increasingly more global and often their children are living in a different country. This can create complex tax implications for trusts that were initially set up with all the beneficiaries living in South Africa.

 

In addition death, divorces, second, third, or even multiple marriages can further complicate matters, and it is imperative that proper structuring and wills be set up to ensure a smooth transition of assets.

 

As custodian of our clients’ hard earned assets, we seek to ensure funds are correctly invested objectively over time in the appropriate mix of asset classes and in the correct structures so that, ultimately, their money and their investments grow.

 

Hopefully a modern family will then have achieved most of their life goals, which their money will have funded. A comfortable home, happy and well-educated children, travel, the ability to retire comfortably and with dignity. 

 

READ MORE: Tackling intergenerational wealth planning in a complex world

The paradox of happiness

The final, and perhaps most crucial and rewarding pillar of guidance from a trusted financial expert is the ability to facilitate the evolution and expansion of material wealth into contentment and happiness in the lives of our clients and their families.

 

The million dollar question is whether money can buy happiness. The answer, like everything, is more complicated. What do we mean by happiness?

 

In a groundbreaking seminal work released in the US in 2010, two Nobel laureates, psychologist Daniel Kahneman and economist Angus Deaton studied the relationship between money and happiness. Their research differentiated between two types of happiness or well-being.

 

The first, emotional well-being, related to the quality of a person's daily experience encompassing joy, sadness, anger, anxiety etc. The second was called life evaluation, or life satisfaction, and was a measure on a scale from zero to 10 as to how satisfied and happy that individual was about his life.

 

As expected, people's life satisfaction rises steadily with income, regardless of comparative wealth. The more money you have, the better your standard of living and the more improved your lifestyle becomes.

 

However, emotional well-being was found to level off. Many studies support this finding that above a certain level of income, there is no direct increase in the level of emotional happiness. The foundation of this assumption is that once a human's basic or perceived needs are met, the further accumulation of material gains does not necessarily bring with it the expected increased happiness. 

It is a common misconception that people who have accumulated significant wealth are happier than those who have far less. Many money-rich families are ironically not nearly as elevated on the personal happiness scale as would be expected. More money can cause unhappiness and distress among families due to a lack of a proper framework and clarity.

 

Inheritances, whether hard cash or assets, may cause infighting among siblings and widows. Unhealthy and outdated practices of inheritance may result in bitterness and feuding. A carefully thought out and structured plan with the help of a financial expert can avoid many of these common pitfalls.

 

In our line of business, we often see people in transition - people who have retired with significant pension funds or people who have recently sold their business for substantial amounts. Many times, these people experience a deep sense of loss of identity and unhappiness for a number of years, in part because they had identified who they were mostly with their work.

 

Our role here becomes more of a psychologist as we have a wealth of first hand personal knowledge of individuals transitioning through similar situations and can share our experiences and antidotes in order to help them through these difficult periods.

 

We as financial physicians have tried and proven methods for where more money itself may lead to unhappiness. And we can then give our clients the best possible chance to set themselves up for greater life satisfaction. But ultimately thereafter, there is much evidence to show that it’s what you do with your money and how you live your life that will create ultimate fulfilment.

 

READ MORE: David M. Rubenstein – a philanthropist shares his view

 

Sonia Lyubomirskey, a psychology professor at the University of California and who’s inspirational book “The How of Happiness” suggest that rich people aren’t as happy as we’d expect.

 

The richest Americans, those earning more than US$10 million annually, report levels of personal happiness only slightly higher than the office staff and blue-collar workers they employ.

 

In a further study of well-off adults, more than half reported that wealth didn’t bring them more happiness, in fact, a third of those with assets greater than $10 million felt that money bought more problems than it solved.

 

Lyubomirskey’s wide body of research proposes that there are three main factors determining human fulfillment. Her studies showed that while 50% of individual differences in happiness are determined by genes, only 10% are determined by life circumstances, and the remaining 40% are determined by our intentional choices and activities.

 

This would imply that apart from one's genetic disposition, it’s actually what you do with your money that defines how happy you are. Whereas we are inclined to assume that circumstances play the biggest role in our happiness, her personal research suggests that they play a significantly smaller role, and that we tend to overlook the true sources of personal happiness and wellbeing. 

New US research has found that we may get longer-lasting happiness by giving to others, rather than receiving for ourselves. People found much greater happiness by giving to others and the happiness levels was the same on the last day as on the first.

 

In January 2018, a course titled, "Psychology and the Good Life" by Dr Laurie Santos, a professor of psychology and cognitive science at Yale University became the most popular course in the university's history, with approximately a quarter of Yale's undergraduates enrolling.

 

She believes that you can actually learn to be happier by practising each day. Her courses are called “rewirements” – a play on the word college requirements – since they have been proved to re-train our thinking. Her seven main takeaways are as follows:

 

  1.  Your mind lies to you about what will make you happy.
  2. Make time for making social connections
  3. Helping others makes us happier than we expect
  4. Make time for gratitude every day
  5. Being in the present moment is the happiest way to be
  6. Healthy practices matter more than we expect
  7. Become wealthy in time not money 

As South Africans, we have many reasons to be happy. We live in a geographically enchanting land with a vibrant and diverse history and culture. One of the observations I have made of the wealthy people I look after is that many are giving every day to their immediate communities.

 

READ MORE: Philanthropy – why a strategic approach is best

 

I have been incredibly moved to see so many of our clients giving to the communities around them during this crisis. Some have asked to be involved in Investec’s charitable initiatives. The R1bn each from the Oppenheimers and the Ruperts to the Solidarity Fund were not insignificant amounts. South Africa will grow and heal with generous help of this nature.

 

This Covid-19 pandemic has propelled us into new ways of dealing with and relating to each other. Webex, Zoom, Whats App and Skype are all becoming central pillars in our interacting and connectivity. In times like these, it is not a huge leap of imagination to picture a world where the human wealth manager is replaced by a machine. Your future financial physician may well be augmented.

 

There is however something menacing and dehumanising in imagining this dystopian future. I believe that it takes a real human, with the accompanying emotions, human feelings and the innate understanding of the human condition to make the absolute human connection. 

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