Do you see your favourite future as a cliff edge ending to the industrial treadmill or an opportunity for greater significance?
The Misunderstanding of Economic Activity
The concept of “economic activity” is often overlooked in the realm of financial planning, despite being its cornerstone. Economic activity refers to the actions of providing, making, buying, or selling goods and services to meet daily life requirements. It is the engine that drives cash flow, and by extension, financial planning. Yet, this crucial element is frequently misunderstood or entirely ignored by those who label themselves as financial planners.
The Bias of Intermediation
The reason for this oversight is deeply rooted in the structure of the financial industry itself. Many who call themselves financial planners are, in reality, financial intermediaries. Their primary role is to act as a bridge between consumers and financial products, such as insurance policies or investment vehicles. Their revenue model is often commission-based (though misleadingly labelled adviser-fee-based), tied to the sale of these products. This creates an inherent bias against focusing on economic activity, which is the real generator of wealth.
The Economic Activity Spectrum
Economic activity is not a one-size-fits-all concept; it varies from person to person. On one end of the spectrum are the economically inactive—those who are not engaged in any income-generating activities. On the other end are individuals with a significant surplus of earnings over consumption. Traditional financial planning often ignores the former and targets the latter, as they are more likely to purchase financial products.
Many financial planning clients end up with far more product than they need for a comfortable life, and the only beneficiaries of the additional misery and anxiety are the planner, the shareholders where there is agency, and the taxman.
The Cliff Edge Retirement Fallacy
The bias towards product sales also leads to the promotion of unrealistic financial goals, such as “cliff edge” retirements, where individuals are encouraged to stop all economic activity early on. This approach necessitates the purchase of more financial products to sustain a non-working life, thereby benefiting the financial intermediaries but not necessarily the clients.
Unbiased Financial Planning
True financial planning, devoid of intermediation bias, gives due consideration to economic activity. It focuses on wealth creation through active engagement in the economy for longer, rather than merely preserving existing wealth through financial products. It offers a more holistic approach, taking into account the individual’s entire economic landscape, from income and expenses to investments and liabilities. Importantly, it considers the contribution economic activity makes to improving eudaimonic well-being.
Conclusion
Understanding and incorporating economic activity is vital for effective financial planning. It shifts the focus from product sales to genuine wealth creation and preservation. As we move towards a more democratised and decentralised financial planning landscape, it’s crucial to remove the bias of intermediation to give economic activity the attention it rightfully deserves.
Academy of Life Planning 