Primitive Medicine

Historically, the practice of medicine was based on the belief that diseases were caused by supernatural forces. Without the scientific method, treatments were based on folklore and conjecture, lacking a systematic approach to understanding, diagnosing, and treating diseases.

Primitive Financial Advice

This is the era before financial planning, we could call it “cave advisory” (where darkness and mist prevailed). From the 1960s to the 1980s, financial advice was provided as a means to sell an investment product. Stocks, mutual funds, structured notes, CFDs, Forex, and life insurance and savings policies were sold to help clients address specific problems. Financial advice provided to the client was given for the purpose of making a sale because, at that time, remuneration was based on commissions (hunting, fishing, and gathering). The idea of a holistic financial plan was unknown, but it was a start, and it was better than nothing. Unfortunately, in Latin America, this form of “advising” still predominates.

Modern Medicine

The late 1880s marked the advent of Medicine 2.0, revolutionized by the discovery that germs cause diseases. This era, driven by the scientific method and the development of antibiotics, saw significant advances in the treatment and cure of diseases. The rapid development of a COVID vaccine is a recent testament to the successes of Medicine 2.0. However, this era has primarily excelled in combating infectious diseases, leaving a gap in the treatment of chronic diseases and preventive care.

Modern Financial Advice

The era of financial planning begins in the 1990s; a concept that had been slowly growing in popularity in previous decades became fashionable. This concept was called “financial planning” and introduced the preparation of a financial plan document as a service provided by financial advisors to their clients. The first movement of financial planning was mainly aimed at the high net worth community willing to pay for such advice and demanding more services and clarity behind their financial decisions. Advisors who advanced towards Financial Advice 2.0 began to incorporate a more holistic view of the client’s situation into their central planning analyses.

Preventive Medicine

Despite the eradication of various contagious diseases and improvements in health duration and longevity, progress against chronic diseases such as cancer, Alzheimer’s, heart diseases, and diabetes has been slow. These conditions, which are best fought with preventive measures taken long before symptoms appear, represent a significant challenge for the current medical paradigm. Peter Attia argues that the future of medicine, Medicine 3.0, will focus on maintaining long-term health through preventive care, aiming to prevent conditions like tumors before they even develop.

This shift towards preventive medicine is increasingly seen in current medicine, with advances in medical scanning technologies, research into metabolic processes, genetic predisposition, among others, aimed at preventing diseases before they manifest. There is a more comprehensive view of individuals’ overall health, diminishing the importance of partial responses from each area of medicine and considering the human body as a connected whole.

Preventive Financial Advice

A key challenge for advisors operating within the Financial Advice 2.0 paradigm is demonstrating ongoing value to clients whose financial plans are on track and investment options are suitable. This challenge is driving the industry towards the next phase of its evolution.

Visualizing Financial Advice 3.0

Drawing parallels with Medicine 3.0, the future of financial advice could focus on:

1. Preventive Planning: Just as Medicine 3.0 emphasizes disease prevention, Financial Advice 3.0 could focus more on preventing financial problems before they occur. This approach would require a shift towards more proactive monitoring of financial health and lifestyle planning to avoid future financial difficulties. Just as we incorporate black hexagons on food packaging to alert consumers to excessive harmful substances, we should incorporate black hexagons for many financial products that try to sell to us through social networks, media, and financial institutions. We must also consider the inclusion of health, life, fire, and civil liability insurance policies, which will protect people’s plans for an insignificant cost in their life budget.
2. Personalization: Tailoring advice to each client’s unique financial situation, goals, and risk tolerance, considering their life stages, personal values, and changing circumstances. This may also involve leveraging technology and data to gain deeper insights into personal financial planning. We cannot attempt to solve a partial financial problem for a person without considering their comprehensive financial situation; irreversible mistakes could be made.
3. Improving Financial Health: Like the concept of health in medicine, Financial Advice 3.0 could aim to extend the years in which a person enjoys financial well-being, not just prolonging their financial life. This would involve strategies to ensure that clients can maintain their desired lifestyle and achieve their financial goals without the risk of overconsuming their resources. Specifically, we must work on the correct quantification of goals and objectives, trying to eliminate the emotional and cognitive biases of people that can lead us to make terrible financial decisions that complicate the client’s lifestyle.

The “Soft Side of Financial Planning” emphasizes the importance of relational and communicative aspects of financial advice in the era of Financial Advice 3.0. As technology automates and streamlines the financial planning process, advisors have the opportunity to deepen relationships with clients through increased interaction and engagement. This shift towards a more client-centered approach is supported by the use of tools and analytical resources aimed at improving communication skills and relationship building. Studies, such as one by McKinsey & Company, predict that by 2030, advisors will become “wealth coaches” rather than just investment managers. Strategies to increase client engagement include pre-meeting tasks and asking more meaningful questions to uncover clients’ deeper concerns, as suggested by Meghaan Lurtz. A study by the prestigious fund house Vanguard shows that half of the value of advice comes from “behavioral coaching”. Additionally, new technological tools are being developed to help advisors create more engaging and understandable financial planning materials, signaling a move towards integrating emotional intelligence and technology to better serve clients in financial planning.

Implications for Financial Planning

Drawing a parallel with health practice, financial advisors and planners must increasingly incorporate technology into their practice and take an independent, preventive, and conflict-free stance to provide value in a rapidly evolving landscape. Just as patients question their doctors in the consultation when receiving a prescription because they researched its side effects on the web, advisors can no longer sell expensive and inefficient products to their clients because the information asymmetry with clients is decreasing, and access to information is practically universal.

In summary, both the medical field and the financial planning industry are moving towards a future that emphasizes proactive, preventive measures, personalized conflict-free care, and the integration of technology to improve outcomes.

For financial advisors, understanding and adapting to these changes is crucial to providing value in a rapidly evolving landscape.

Ec. Juan Martín Rodríguez, CFA