By Ryan O. Murphy, global head of behavioural insights at Morningstar
Establishing and understanding client goals are essential elements of good financial planning. But clients are often strangers to themselves and need help to define meaningful goals.
Without goals there’s no motivation, no timeline and no plan. But finding that goal can be a very hard question to answer.
People are often unaware that they don’t know their own financial goals. The challenge facing advisers and planners is helping clients realise what they don’t know before working with them to reach more meaningful objectives.
There’s more to goals than might meet the eye
In our long-running behavioural research at Morningstar we have defined two levels of goals.
The first are surface goals. There are the typical financial goals that will be familiar to advisers, such as saving for retirement, educating children or buying a second home.
But there are also deeper goals – the motivations that drive surface goals. These are closer to values and connect to an individual’s need to live a fulfilling and meaningful life.
For example, a surface goal may be to retire early, but the deeper goal is to have more time for family, hobbies and charity work. This deeper goal can potentially be achieved sooner and at less expense by scaling down working time rather than stopping work entirely.
Deeper goals are more abstract and flexible, both essential qualities for long-term financial planning. Our vision of the future can be impaired by current minutiae while circumstances and priorities can and do change over time.
Uncovering real financial goals
Goals are the first step in effective financial planning, but good outcomes require those goals to be both personally important and achievable.
One of the many behavioural biases we can come up against when asked what our goals are is reflecting top-of-mind priorities rather than deeper held ambitions.
Rather than just asking what your goals are, a simple behavioural nudge in the form of a list of common goals can help clients discover and articulate their surface goals.
Our research found that around three quarters of respondents changed at least one of their top three goals after seeing them alongside a list of 17 common financial goals. These included ‘pay for self-improvement’, ‘stop working and do something I love’ and ‘feel secure about my finances in retirement’.
The final goals were more personal, detailed and emotionally grounded. This emotional element carried into our most recent research.
Deeper goals are what really make us tick – they make us happy and bring fulfilment. They are, in other words, grounded in positive psychology. We applied the positive psychology framework PERMA-V (positive emotion, engagement, relationships, meaning, accomplishment and vitality – all of which have their own benefits and can be goals in their own right).
The first step was to ask the sample to list their financial goals with a brief description of what that might mean. Now, this was not a representative sample as it was the audience of a wealth management podcast.
Respondents tended to be younger, male, wealthier and more financially literate than the general population. It did, however, give a strong test of the effects of framing in this way on the process of setting financial goals. This sample was more likely to have a decent understanding of where they want to get to.
The next step was asking investors to double their list, encouraging them to spend more time thinking about their goals.
Finally, after being given the PERMA-V framework and then told that goals may fall into the six categories, they were asked to add any additional goals.
Our analysis of both how abstract the goals were – and so how suited to long-term thinking – and the topics yielded some valuable insights.
First that simply asking investors to double their list of goals led to the lowest level of abstract thinking. Structure and some guidance are needed to help people dig deeper for meaningful goals.
Second was that the prevalence of topics depended on the prompt. Goals were largely unchanged between the first and second step. Introducing the PERMA-V framework brought about a meaningful shift from top-of-mind thoughts or even surface goals.
‘Affording a healthy lifestyle’, ‘being able to give back’, ‘engaging in hobbies’ and ‘having fulfilling work/purpose’ were among the most common topics. These are the deeper goals which make life worthwhile and bring about a sense of wellbeing.
A low input but high impact process
Surface goals and deeper goals both have a role to play in financial planning. More personally meaningful goals have a better chance of success – motivation and satisfaction are grounded in the person and what makes them happy, not some arbitrary benchmark.
The PERMA-V framework can have a meaningful impact on how people think about and articulate their goals in just a few minutes, learning more about themselves and what matters.
It can slot easily into the financial planning process, helping advisers get their clients to where they want to be, but with a less restricted view and a little more flexibility along the way.
