“Nothing is more powerful than an idea whose time has come.”
- Victor Hugo
Not all that long ago, Financial Planning for most American families consisted of passbook savings accounts, Christmas Club, Layaway and a series of envelopes containing cash for specific needs tucked neatly away in the credenza.
For better or worse, it’s fair to say that things are a bit more complex today.
While the “profession” of Financial Planning was born among a small group of forward thinkers just 50 years ago this month, investing has a much longer and storied history.
Writings about investing can be traced back to 1700 BC where the framework and rules for pledging collateral was first described in the Code of Hammurabi. At the time of the code, only land could be pledged, and it illustrates that investing was an activity of the privileged.
Even if we fast forward to the beginnings of modern investment structure including banks and securities trading, we find ourselves in 1602 Amsterdam.
Either way, it’s obvious investing is considerably more mature.
Things change…and in recent years, change in the financial services industry, like most others, has accelerated. Aided by technology, investing in stock, bond, real estate, and other markets has become cheaper, faster and easier.
At the same time, the complexity driving the need to invest in the first place has exploded and the result is a shift in the value chain.
Over the last 3 decades Defined Benefit Pension Plans have been gradually and steadily replaced by Defined Contribution plans like 401k and 403b plans. This is the result of substantial increase in life expectancy and a steady decline in long term interest rates. These phenomena together made traditional pension plans unsustainable. While few would argue against the need for this evolution, it’s effects are only recently being felt.
When the “defined” (promised or known) benefit was moved from the end (in the form of a paycheck for life) to the beginning, in the form of contributions (to those who contributed money of their own), the baton of responsibility was effectively passed to the individual. With it came a whole new set of required behaviors.
Even if individuals do contribute “enough” (which statistics imply is rare), they bear the responsibility for selecting and managing investments that will provide the necessary growth and income to sustain their years beyond work. In addition, they are tasked with deciding how much is enough, when and how to withdraw from it and how to do so in the most tax efficient way. None of these are easy tasks, and with so many variables in the equation opportunities for error abound.
It's obvious to most that as the “security” (in the form benefits) of working for large companies began to wane people began to seek opportunity in other areas. The massive growth in small businesses vs the steady or slowly declining ranks of the largest companies, is evidence that individuals are more willing to bet on themselves and control their own destinies.
In addition, the Gig economy was born. Made easier by the internet, individuals with marketable skills have created additional income streams or full-blown careers going directly to their audience
In a skilled economy education or specialized training is not optional. Pursuing it requires time and money. The result is that people are entering the workforce later, often with debt. Downstream we see that people get married later, start families later and wait to buy their first home, if they buy one at all.
The effects of each of these social changes could fill volumes, but one thing is sure. There has been a dramatic increase in complexity for the average individual or family where financial decision-making is concerned. There is no map that everyone can follow. Financial decisions no longer occur in relative isolation, but rather have implications across the entire system, and now require a systems approach to addressing them.
While technology has made the functions at the lower end of the value chain cheaper and easier, discernment and good judgement are now more valuable than ever. Don’t go it alone, when so many talented and experienced professionals would happily light the path.
As Victor Hugo so famously said in 1861, “Nothing is more powerful than an idea whose time has come.”
Financial Planning is one of those ideas.