The biggest threat to Financial Planning

I have recently been posting some stats around debt, savings and income. I know some people feel that the clients they deal with don’t fall into these categories but I would argue that these trends highlight the changing society we are in. 

For a long time I have felt emerging markets will be the next developed markets; people have laughed but consider that “80% of the world wants what 20% of the world has”. Now emerging markets also have a very different profile to developed markets and in particular with regards to population growth:

 

1.  In the West population growth is estimated to be less than 1% a year, on a population of 1 billion people. The average age is around 40 to 45
2. In Asia population growth is estimated to be around 1.5% a year, on a population of 4 billion people. The average age is around 30
3. In Africa population growth is estimated to be around 2% a year on a population of 1 billion people. The average age is 19

The point of this is the Western economies have an aging and slowing population. At the moment this group are the greatest consumers, but the market is saturated; there are only so many cars or houses people can have. The markets are maturing but they are also burdened by debt; this is not just personal debt but also economic debt which effectively stifles growth.

This is really important because we are perhaps in a sweet spot at the moment with people reaching retirement with money, and unburdened by debt. Many of this generation come from a generation where debt was not an option; they were savers and never acquired large amounts of debt.

Don’t get me wrong I don’t know the numbers but this is a healthy market to provide financial planning to and their needs are complex, longer life expectancy is something the developed world has over the emerging world but there are challenges to this. The income has to last longer, and there is greater likelihood of catching various diseases like cancer.

So although there is a booming market, this is the peak of the cycle and it is heading downwards. The idea that these people will leave an inheritance is becoming more unlikely as they live longer, and they spend more (i.e. the savings are providing for a longer period of time and therefore will reduce).

The generation coming through are fewer and different; this generation are used to debt. If you want something why save when you can have it immediately. This attitude means that debt becomes a ball and chain. Effectively, you cannot control your cash flow. So say your earnings are £2,000 a month and you pay £500 on debt then the earnings are in reality only £1,500 per month if you have rent / mortgage to pay, and other bills then you are unlikely to have much less for savings.

The argument is that as you move through life you will earn more and actually it will get easier, but in reality as you move up the ladder things change. You start a family, you want to move home, you have education costs, and in this day and age you are more than likely to lose your job at some point. If you are already burdened by debt and paying this down, the additional costs reduce your outgoings and you still have no time to save.

So we can sit there and say, sweet let’s make hay whilst the sun shines or we can do something about it. Firstly we need to be aware of the threat of debt to a client’s financial health but we also need to be able demonstrate what impact this has. For some of our client’s they already know this but do their children, can we as financial planners offer to educate the younger generation? I think the answer is yes, yes we can hold onto this sweet spot but in twenty years’ time the market needing financial planning will be much smaller.

Turning to emerging markets, we are quick to ignore these markets or consider that they have become developed. These countries are like the US in the twenties; until these countries develop proper legal and political systems they will not become developed. But in reality they will this may take a generation to achieve but when they do could it be that we become a third world country burdened by an aging population, heavily in debt and with little savings or income.

So if you ask why I send information on debt and savings perhaps just consider this message.