Foundations

Maslow’s hierarchy of needs is something that people will often mention when they want to sound a bit more clever.

And as it can’t constantly be memes and Traitors’ references round here, I guess it’s my turn today.

In summary, Maslow argues that man’s needs can be classified in order of priority, starting from the basics of physiology all the way up to self-actualisation. Before any of us can progress to the “nice to haves”, we must first build foundations to our lives - ensuring our base needs are met.

The same principles might neatly be applied to our finances as well. If I were to nick Maslow’s methodology and come up with a version for the management of our personal finances, it might look a little like this:

Now we might argue the toss on the classification of some of these activities and I’m sure I have missed a few out - but the direction of travel is fairly uncontroversial to me. Very little point being worried about tax if you haven’t got an emergency cash buffer for example.

By the time we reach the top of the pyramid we really are into “cherry on the icing on the cake territory”. And you wouldn’t think there is much point in obsessing over these final few elements after the cake itself is already baked. It’s a perfectly nice Victoria sponge.

And yet, the wealth management industry focusses almost all of it’s attention on investment strategy. “Mine’s better than yours’”.

In fact, come to think of it, the industry’s order of priority may almost be the perfect inverse of my pyramid. Nice to have, tertiary concepts promoted to centre stage. Base level behaviours relegated to an after thought.

There are a couple of reasons for this I think. First off, there isn’t much money to be made from the bottom of the pyramid.

Knowing and doing might be two different things, but everyone intuitively knows the basics when it comes to managing money. Just as we know intuitively that we must eat to survive.

Reminding people that they must spend less than they earn is not exactly news, and it is not therefore a message that can be easily monetised.

However, chucking a load of greek letters at folk who are rich enough while convincing them that there is a secret vault of investment ideas which allows them to shortcut the necessities - that can be monetised, and in a big way.

The second reason I think that the industry largely ignores the basics is that there is an assumption that wealth and financial literacy are correlated. So wealth management clients don’t need help with the basics.

I, think that can be a naive assumption. The wealthy client may have just as many biases and bad traits as his less affluent peer. These biases may be more embedded and even more dangerous in fact given the numbers at play.

Investment process and proposition are important, I am not disputing that.

But my point is that they are no less important than any of the preceding levels on the pyramid.

And we can no more skip those prior levels in the pursuit of investment “sophistication”, than we can build a home on unsteady ground.

To try to do so, will be to sink into the abyss.

Past performance is not indicative of future returns. None of the above is intended to constitute advice to any individual. Should you have queries regarding your own financial situation then please consult with a regulated financial adviser.