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The 6 Personality Traits of Successful People

Money is what makes all your clients’ priorities possible, Jean Chatzky, financial editor for the Today Show, told FPA Annual Conference attendees earlier this month.

And if they’re constantly worried and stressed about it, they’re probably going to stumble upon what seems like more than their fair share of problems. Though this might sound a little like wishful thinking Chatzky claims it’s true: more happiness will lead to more money for your clients.

Chatzky outlined the six traits of successful and wealthy people that she identified through her research. Chatzky conducted a study of 5,000 people and found that personality traits are just as important as good financial habits.

Here are the six factors Chatzky found were key to success:

Happiness or optimism. Happiness is key to success—just not too much of it. Among Chatzky’s study participants, those who were too happy (a 10 on a scale of 1 to 10, 10 being blissed out) weren’t as successful as those who were an eight. The eights were better problem solvers, they lived longer, were more successful, earned more money, had higher amounts of emergency savings and received greater evaluations from their colleagues. If your clients are too happy, perhaps find a way to make them a little more cognizant of reality; but if your clients are miserable, figure out how they can make themselves happier.

Resilience. Thomas Edison “failed” hundreds of times when inventing the lightbulb, but he didn’t see it that way. He said he succeeded in proving that hundreds of ways didn’t work. People who have resilience can overcome problems in their work, personal and financial lives more readily than people who aren’t resilient.

“The best news about resilience is that you don’t have to be born with it,” Chatzky said.

Connectedness. People who had built up a good amount of social capital—connecting with people—were more successful than people who did not have good connections. These people made time to connect with people despite their “busy” schedules. Successful people not only made time to connect with friends and family but also to forge new relationships.

Passion. Having passion about a career is what moves people from a life of financial struggle to one of financial success. The people who have passion just want it more than others. These people are not just pursing a job or even a career, they are living and doing what is their calling. Figure out what your calling is and live your passion.

Financial Habits. Successful people are habitual savers, have appropriate debt, are able to level emotions and have a long-term plan, Chatzky said. Chances are your clients have better financial habits than the average American (most of whom are terrible savers), but it’s never a bad idea to reinforce their good habits.

Gratitude. You always want more if you’re not grateful for what you already have. Chatzky said gratitude is key among successful people and as a result of them being more grateful, they are also more generous (giving to people and charitable causes), less depressed and healthier.

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Ana Trujillo Limón is associate editor of the Journal of Financial Planning and the editor of the FPA Practice Management Blog. Email her at alimon@onefpa.org. Follow her on Twitter at @AnaT_Edits.

 


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Life After the Storm

Hurricane Harvey devastated Texas and came for parts of Louisiana in late August. More than 51 inches of rain inundated Houston, according the National Weather Service. USA Today reports that more than 30,000 people have piled in to Houston shelters.

Now that the storm waters are starting to recede, the full scope of the damage is starting to come into focus. According to AccuWeather, the total damage is expected to reach $190 billion, almost four times the amount of damage caused by 2005’s catastrophic Hurricane Katrina. Insured losses, according to CNBC, are expected to reach $20 billion.

There is a long road to recovery ahead. Here are some tips to keep in mind as you begin to assess and address the damage to your businesses and to your clients:

Take care of you first. With 475 members in the FPA of Houston chapter, no doubt you are suffering yourselves. Carolyn McClanahan wrote in Financial Planning that you must help yourselves before you help others. But when you do have some semblance of starting to recover and you’re ready to reach out to your clients.

Let your family, friends, and clients know you’re OK. You can Tweet, post on your firm’s Facebook or Twitter page.

Jonathan Swanburg, CFP®, an adviser affected by Harvey, wrote in Financial Planning how when he reached out to his clients, they only wanted to ensure that he was safe.

“When I sent out an email on Friday morning praying for our client’s families and explaining our firm’s contingency plans for flooding and loss of power, none responded on the business issues at hand,” Swanburg wrote. “Instead, they all expressed concern for my team and our families.”

Make sure they’re OK. Call them when you get a chance. Many of them might not answer but try until they do. Ensure they are physically and mentally alright before tackling the concrete financial issues. The emotional toll of this catastrophe will be just as high as the financial toll.

Many might need extensive repairs not covered by their insurance. According to the Washington Post, majority of the homeowners in areas hit hardest by Harvey don’t have flood insurance. Citing data form the Federal Emergency Management Agency, the Washington Post reports that only 17 percent of homeowners in the Texas counties hardest hit have flood insurance.

“Unfortunately, most families in Houston do not have flood insurance and are going to be struggling for a very long time,” Swanburg wrote.

If your clients are among those without flood insurance, look into federal disaster relief aid (go to DisasterAssistance.gov), U.S. Small Business Administration disaster loans, or home equity loans. Be advised that homes must first be repaired before a home equity line is approved.

Help with the insurance processes. CNBC reports that insured losses from this storm could reach up to $20 billion. And it will likely be some time before adjusters can get in and assess the damage. Advise clients to make only repairs that prevent further damage until adjusters can come. Have them take pictures of everything. Save all receipts for materials, housing, meals, and storage. Encourage them to file claims as quickly as possible. Keeping receipts will also help with claiming a casualty loss on their tax returns.

Utilize your contacts to expedite getting your clients the help they need. McClanahan said that insurance agents are overwhelmed during disasters. Adjusters work on a first-come, first-served basis, so if you have connections in the insurance industry, utilize them to better serve your clients.

“While Harvey was a catastrophe for millions of people,” Swanburg wrote, “it was also a reminder that at its best, financial planning is a uniquely personal business built around wonderful people and lifelong relationships.”

If you are an FPA member set to renew this month and were affected by Harvey, FPA will extend your membership while you’re recovering. If members affected by Harvey have registered for FPA Annual Conference, refunds will be issued if you are unable to make it. Contact Member Services for more information, 1-800-322-4237 or email MemberServices@OneFPA.org.

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Ana Trujillo Limón is associate editor of the Journal of Financial Planning and the editor of the FPA Practice Management Blog. Email her at alimon@onefpa.org. Follow her on Twitter at @AnaT_Edits.


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Use These Behavioral Tips to “Science” Your Clients on Saving

According to a 2017 study from the Employee Benefit Research Institute (EBRI), only 61 percent of responding American workers reported having saved money for retirement, with 56 percent of respondents reporting they are currently saving (at the time of the survey) for their golden years. Only 18 percent of respondents feel very confident that they are doing a good job preparing for retirement, with another 38 percent feeling somewhat confident.

As a financial planner, this isn’t news to you, though it may be more disappointing for you than most given your line of work. As someone on the front lines of trying to help people understand the value of saving for anything later in life, you know it can be an uphill battle.

In this post, I want to provide you with a few tools to help your help clients get past some of the standard pitfalls around saving, using the very science that generates the issues as your weapon. Helping clients understand the reasons behind why we make excuses to avoid saving may be just what they need to overcome these challenges.

Excuse No. 1: I don’t have enough money to save.

For some investors, this is a valid excuse. If the money’s not there, it’s not there. For others, however, it may be the type of Catch-22 situation that you can help attempt to reverse simply by understanding behavioral tendencies. In other words, the old adage telling us that “the more we make, the more we spend,” is actually deeply rooted in behavioral science.

One of the more useful qualities we have as human beings is our ability to quickly adapt to changing circumstances. But some experts like James Roberts, professor of marketing at Baylor University, believe that our adaptability may hinder us in terms of saving and spending. He uses the example of a college student who wants to get out of his or her dorm, then moves into a rental house but gets tired of having roommates, then dreams of a small house, then a bigger house (and on and on from there) to show that our minds very quickly move on to the next step when we attain a goal or desire.

Another reason behind our penchant to overspend and under-save is simply that we may have seen it from our parents and them modeled the behavior. In other words, over time, we have fostered and intensified these bad habits which, as we all know, can be extremely difficult to break. However, some researchers believe that we have the ability to change almost any habit through repetition via a series of mental processes.

While you (and by extension, your clients) can be the judge of whether this might work for you, I would recommend picking up the book The Power of Habit by Charles Duhigg, which takes a serious look at habit formation and the science behind why we do what we do. Besides the interesting case studies and frameworks, the heart of Duhigg’s theory centers on the importance of simply understanding that habits can be broken:

“Once you understand that habits can change, you have the freedom—and the responsibility—to remake them. Once you understand that habits can be rebuilt, the power becomes easier to grasp, and the only option left is to get to work.”

The point? Clients may be, in some ways, relieved to hear that the negative behaviors that keep them from saving money are not totally their fault (thanks a lot, science), but an equally important part of the message is that there are ways to fight to overcome these ingrained habits.

Excuse No. 2: Retirement (or other savings goals) is/are just too far in the future to focus on today.

I was meeting friends at the National Western Stock Show in Denver a few summers ago, and when I arrived, I realized that I hadn’t purchased tickets (and as a result, probably could have reached up and touched the roof from the nose-bleed seats I had to grab on-site). My immediate thought was, “How did you not think to do the one thing you needed to do prior to attending that event?”

According to a recent study, part of the answer (beyond my own struggles in staying organized) may be that I made the plans too far in advance for my brain to plan for that contingency. This story dovetails well with one of the most common excuses for failing to save for retirement (or other goals)—investors just don’t have the wherewithal to plan that far ahead. If it’s difficult for us to plan for an event a few months down the road, remember that your clients are looking at planning 30 or 40 years into the future.

According to Dale Griffin, associate dean and professor of marketing at the Sauder School of Business at the University of British Columbia, we can look at “temporal construal” and “loss aversion” as potential behavioral biases that make it difficult to make good decisions about our future. Griffin explains “temporal construal” as the tendency for far-off events to be mentally experienced differently than closer events.

“Events or ideas far off in time are thought of in abstract and general terms, with an unavoidable overlay of optimism; so thinking about yourself (or your children) in 40 or 50 years creates a mental image that is akin to pondering a vague, general, overly rosy idea rather than a detailed individual with real problems,” Griffin wrote in this Slate article.

In the same vein, studies on the theory of “temporal discounting,” or the idea that individuals prefer more modest immediate rewards to larger potential future rewards, have shown that we have trouble seeing future events in clear focus and difficulty in attempting to imagine what our future selves will look and act like. One can see how these types of mental blocks can affect our ability to take saving for the future seriously in the present.

“Loss aversion,” according to Griffin, is essentially the idea that humans are more likely to think about potential “losses” than potential “gains” in the long term. In other words, we are programmed to be more worried about future debt than what we might “gain” by saving for retirement, which may result in attempting to pay off our mortgages or student loans more quickly, at the expense of building a retirement account.

However, the idea that repetitious activities in the present, such as monthly mortgage or student loan payments, can help our minds focus on making decisions to solve long-term challenges in the present, can offer a glimmer of hope from a savings perspective. Specifically, the idea that providing ourselves with short-term rewards or benchmarks (instead of trying to visualize a single “number” or long term goal), may be helpful in building a saving habit for the long-term, and can at least provide a place to start (or something to hang our collective hat on).

In addition, these findings may help you help your clients look at the tendency to not save enough with a fresh perspective, and to consider fresh solutions. Instead of beating themselves up because they failed to meet their savings goal for the third straight month, they could try something more constructive and potentially even fun.

For example, you may recommend that they download of the many free face-aging apps available for iPhone or Android. AgingBooth and FaceApp are two of the more popular applications that use alogrithms and neural-network technologies to show us what we might look like when we’re much older. Although the accuracy of the imagery is certainly up for debate, I can attest that seeing my face aged years into the future was a disconcerting experience and provided a surprising dose of perspective.

Perhaps these applications give you a unique opportunity to break through the “temporal discounting” barrier and make the idea of aging more real for your clients. MerillEdge, in partnership with Bank of America, was one of the first to launch this type of application in 2014 (called FaceRetirement), and according to Bank of America, 60 percent of the nearly 1 million people who used the app chose to learn more about retirement and beginning to plan for the future.

Or, because the causes we have discussed have roots in behavior, perhaps finding a few easy-to-consume, investor-friendly articles to share with your clients on behavioral science will help provide some useful insights that they just didn’t have before. While we can’t say the same for all financial topics, it is an extremely interesting part of what you do as a planner and has the potential to engage a wider audience.

Excuse No. 3: I can’t save money because I lost too much in the last crisis.

There are certainly situations where this might be true, and if that’s the case, your client is in good hands working with a planner like you. For many others, and especially individuals in younger generations, the statement above is a prime example of the “sunk cost fallacy,” the very same behavior that kept me sitting in the theater during the fourth installment in the Transformers franchise instead of walking out after the first 20 minutes.

A “sunk cost” can be defined as any cost (not just monetary, but also time and effort) that has been paid already and cannot be recovered. The “sunk cost fallacy” is an extension of the human behavior of “loss aversion” mentioned above, in that we are programmed to focus more on the costs we have already accrued (and that we can never get back) than the future experience we are putting our time, money or effort toward.

Thus, the more we invest in something, the harder it may be to let it go (even if it turns out to be a terrible investment). I’m sure that every one of your clients can think of a time where they continued to stick with something for the sole reason that they had already put a lot of money or effort toward its completion – we all have. And to be clear, sometimes that can be a good thing (i.e., finishing a degree, completing a rigorous fitness program, climbing a difficult peak, etc.).

However, the “sunk cost fallacy” can become an issue with saving money, because subconsciously, our minds may be thinking about the money we have lost in the past and urging us to try to get that investment back. As you are well aware, this can encourage risk-taking and other behaviors that have the potential to cut into the portfolio your clients have worked so hard to build.

Conclusion

If this was easy, Amazon wouldn’t have 105,000 results on the search term “behavioral science.” The human brain is a powerful tool, and as such, each of the behaviors I mentioned here will not be easy to counteract.

Because these behaviors are all propagated by the mind, simply understanding the “why” behind our struggles to focus on the future is an important place to start. Learning how these behaviors may affect them in a saving capacity is only the first step for your clients—the next will be helping encourage them to put in the effort on a daily basis to overcome these obstacles.

Your clients are facing an uphill battle, but there’s nobody better than you to help guide them.

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Dan Martin is the Director of Marketing for the Financial Planning Association, the principal professional organization for CERTIFIED FINANCIAL PLANNERTM (CFP®) professionals, educators, financial services professionals and students who seek advancement in a growing, dynamic profession. You can follow Dan on Twitter at @DanW_Martin.


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Interest, Curiosity and the Client Education Conundrum

I had the opportunity to attend a day-long session with Brené Brown last year, and among the many powerful takeaways from her talk was my first introduction to a fascinating study from Amanda Markey and George Lowenstein on interest and curiosity. I’m somewhat embarrassed to admit that, before reading through the research, I didn’t realize there was a fundamental difference between interest and curiosity.

It turns out that, if you agree with Lowenstein and Markey’s conclusions, there is actually a significant difference between the two, and that the distinction can have a powerful impact not only on how we view and implement the pursuit of knowledge for ourselves, but for clients as well.

Lowenstein and Markey said: “We define interest as a psychological state that involves a desire to become engaged in an activity or know more, in general, about a subject. If an individual is interested in pottery, for example, that person may want to sit down and throw pots, or that person may want to know more about the technique, the materials, and the history. Curiosity, in contrast, only arises when a specific knowledge gap occurs, such as, ‘What is the difference between high and low fire pottery?’ Thus, curiosity and interest differ by their objects of desire (specific knowledge vs. general knowledge/activity engagement).”

In other words, to be truly curious about something, you must have a certain level of knowledge about the subject—enough to ask a particular question or questions. For an example, let’s take a look at my initial interpretation of the results of Jackson National’s 2017 Investor Education Survey. Jackson generally runs the survey annually, and releases useful data on investor knowledge and confidence in the U.S.

The key findings from the survey highlight a gap between perceived financial knowledge and confidence (nearly 60 percent of all respondents stated that they did not have the confidence to make appropriate investing decisions) and U.S. investors’ interest level in building their knowledge and confidence (nearly 70 percent of respondents said they are very or somewhat interested in furthering their financial/investing education).

Initially, I looked at this gap as a black-and-white opportunity—if we (the financial services industry) can count on a certain level of interest, we just need to help people find the right resources or help to start educating themselves, right? Then, when they reach the point at which they’re ready for expert help and an adviser relationship, they will take the next step.

Based on the Markey and Lowenstein research, I think the answer is more complicated than that. What we’re talking about is the classic Catch-22 scenario, and it applies directly to both how investors educate themselves and how advisers educate clients. The research suggests that, if investors don’t have the financial knowledge to make appropriate investing decisions, unless they force themselves to understand the basics, they can never be curious enough to answer the fundamental questions about preparing financially for life. In other words, a rudimentary understanding of finance is required for investors (or clients, if they are already in your care) to be curious enough to seek further knowledge.

Thus, while interest remains the baseline (without interest, we are pretty much out of luck), the financial services industry in general and financial planners in particular must take a more active role in convincing clients to take that crucial step toward activating curiosity and the quest for deeper knowledge. As a financial planner, you are likely the primary source for your clients’ financial education, and data from the aforementioned Jackson survey supports that many investors working with financial planners rely solely on their planner when it comes to the sharing of financial knowledge. This is a crucial function of the planner-client relationship, but I believe the Markey and Lowenstein research shows us that it can be a double-edged sword in that too much reliance on the planner may actually reduce clients’ personal interest in or curiosity about financial topics over the long term.

Of course, that’s not to say financial planners should stop offering financial education support to clients. Quite the opposite. But I do think it’s important for planners to make sure that investors are not separating themselves from the pursuit of financial knowledge when they enter into the planning relationship. Planners may need to take on the responsibility of not only providing clients with the proverbial fish, but teaching them how (and why) to fish as well. So, the question becomes, where do we begin?

I wish I could provide a perfect formula on how to motivate clients to master the basics and activate their curiosity, but unfortunately there isn’t a “magic bullet” here. We are all so different when it comes to our current level of knowledge, how we motivate ourselves and even how we perceive what constitutes “the basics,” that to cast a single net designed for universal application would be beyond foolish.

To provide a semi-prescriptive starting point, however, we can look to the Lowenstein and Markey research, which said that the intensity of curiosity depends on importance, surprise and salience.

Importance

To satisfy the first criterion, we need to make clients’ curiosity about financial and investing topics personal so that they will feel important to them. For example, when your clients have children, crafting a will and testament or putting away money for higher education can become an urgent and tangible issue. When an issue becomes directly applicable to our lives, we inherently become more curious.

As a financial planner, you are already adept at tying financial concepts and strategies to a clients’ situation, but the fundamentally fluid nature of “importance” in the context of curiosity is a valuable reminder that a concept or strategy a client had little interest in can suddenly become a focus as a result of a life transition. This knowledge may allow you to pre-empt questions from clients about certain concepts with relevant content, further building the relationship, or provide a useful framework for your prospecting strategy.

Surprise

For surprise, human beings rely on our current understanding of the way things are and use curiosity to test the accuracy of our knowledge. When our frame of reference is broken with new information, we are more likely to dig deeper for even more revelatory insight. Or, as Lowenstein puts it, “the accumulation of knowledge tends to beget the desire for further knowledge.” As mentioned, the element of surprise makes the case for frequently sharing interesting and engaging content with clients in an attempt to spark further interest in a topical area or the world of financial knowledge as a whole.

I think the importance of surprise in sparking curiosity also serves as a good reminder to avoid marketing for marketing’s sake. Instead of sending out something your clients or prospects have already seen or a story they’ve already heard because you are running up against your newsletter deadline, it might make sense to search for or create a new angle on an old story, or to survey your clients on their most burning questions and attempt to answer those in a post. From a blogging perspective, Google always favors quality over quantity, and your readers certainly do too.

Salience

Finally, salience is the degree to which your environment highlights a particular information gap. According to Lowenstein, salience will tend to be high when a question is asked explicitly, and may be “even higher if there is another identifiable and proximate individual who knows the answer.” While not everyone needs or wants expert help when it comes to financial and investing discussions, the importance of salience in enhancing curiosity is an oft-overlooked component of the value of a financial planner.

That someone, somewhere knows the answer to our question is not of great value to us (and can actually decrease curiosity). But if that person is sitting across the table from us, with the added bonus of understanding the most intimate portions of our financial lives, the level of salience increases significantly. As it’s not always easy to find new ways to represent your value as a planner, research on the power of salience could come in handy.

As mentioned, there is certainly not one right way to go about educating clients, and many of you already have an excellent formula that works for you and your practice. That said, my greatest takeaway from Markey and Lowenstein’s wonderful research is the reminder to challenge everything, even the things we think we know best. I think your curious mind will thank you.

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Dan Martin is the director of marketing for the Financial Planning Association®, the principal professional organization for CERTIFIED FINANCIAL PLANNER (CFP®) professionals, educators, financial services professionals and students who seek advancement in a growing, dynamic profession. He is an award-winning author with a diverse financial services industry background in marketing and communications. He earned a journalism degree from the University of Denver and his MBA in marketing from the Daniels College of Business.


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Top Blog Posts of 2016

Last year, 2016, was a record-breaking year in the number of visitors and views for the Financial Planning Association’s Practice Management Blog powered by the Journal of Financial Planning.

Here are the top 10 most-viewed blog posts of 2016:

No. 10: “Becoming an Authority: Establishing Your Financial Planning Career.” Emily Fisher, marketing copywriter for Advantage Media, gave planners tips on how to put themselves out there and attract new clients.

No 9: “Top Ten Tips to Implement CRM.” Jennifer Goldman, founder of My Virtual COO, gave planners insight into the best practices in order to maximize their CRM.

No. 8: “Fiduciary Rule for the Modern World.” This post covered the key elements from the press conference that announced the Department of Labor’s Final Rule (fiduciary rule and discussed FPA’s resources for its members.

No. 7: “7 Do’s and Don’ts of Collaborating with Estate Planning Attorneys.” Attorney Gary Altman gave planners insight on what you should look for when it comes to partnering with estate planning attorneys. This post was derived from an answer to a member question on FPA Connect.

No. 6: “9 Things Clients Need to Know about an Adviser.” Regular blog and Journal contributor Kirk Loury gave readers an overview of the things you should be communicating to your clients about yourselves.

No 5: “Advising Clients During Turbulent Times.” Professors Kent Baker (0f American University) and Victor Ricciardi (of Goucher College) gave insight into how to best handle clients who may be distressed during market downturns.

No. 4: “You Cannot Do this Alone.” In this post, Daniel Crosby, behavioral finance expert, published an excerpt of his book, The Laws of WealthThis post discussed the value financial planners bring to clients

No. 3: “8 Components of Social Media Policy.” Claudio Pannunzio, president of i-Impact Group Inc., offered planners the elements that should be included in a successful social media policy, including having a purpose, identifying authorized contributors and having an employee code of conduct.

1216JFP_BestOf2016_Cvr.inddNo. 2: “Framing the Conversation: What to Say in the First 60 Seconds.” Regular blog contributor Daniel Finley, president of Advisor Solutions, gave planners an outline for what to say to potential clients in the first minute.

No. 1: “How to Create Your Ideal Client Profile.” This year’s most-viewed blog post, another by Claudio Pannunzio, discussed how to successfully create an ideal client persona to better attract the clients you want to serve.
If you want to know what we determined as being the best of the Journal of Financial Planning, check out our Best of 2016 issue (picture, right) featuring a “2016 Personal Finance Year in Review,”  by the Journal‘s Academic Editor Barbara O’Neill.

Are you interested in contributing to the FPA Practice Management Blog? Email us with story ideas or content.

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Ana Trujillo
Associate Editor
Journal of Financial Planning
Denver, Colo.


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You Cannot Do This Alone

Dr. Daniel Crosby is a behavioral finance expert, frequent FPA speaker and President of Nocturne Capital. In his new book, The Laws of Wealth, Crosby touches on ten laws for managing investor behavior and also sets forth a new paradigm for asset management known as rule-based behavioral investing or RBI. An excerpt of the second chapter of The Laws of Wealth is included below. 

Laws of Wealth

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Law #2 – You Cannot Do This Alone

In an era of seven-dollar trades and fee compression, some have been quick to dismiss the traditional advisory relationship as a relic of a bygone era. Years ago, brokers and advisers were the guardians of financial data, the keepers of the stock quote. Today, investors need only an iPhone and a free online brokerage account to do what just 30 years ago was the exclusive purview of Wall Street. It is worth asking in such an age, “Is my adviser really earning her fee?” An appeal to the research shows that the answer is a resounding “yes,” albeit not for the reasons you might have supposed.

In a seminal paper titled, “Advisor’s Alpha,” the famously fee-sensitive folks at Vanguard estimate that the value added by working with a competent financial adviser is roughly 3 percent per year. The paper is quick to point out that the 3 percent delta will not be achieved in a smooth, linear fashion. Rather, the benefits of working with an adviser will be lumpy” and most concentrated during times of profound fear and greed. This uneven distribution of adviser value presages a second truth that we will discuss shortly; that the highest and best use of a financial adviser is as a behavioral coach rather than an asset manager.

Further evidence of adviser efficacy is added by Morningstar in their whitepaper, “Alpha, Beta, and Now… Gamma.” “Gamma” is Morningstar’s shorthand for “the extra income an investor can earn by making better financial decisions” and they cast improving decision-making as the primary benefit of working with a financial adviser. In their attempt at quantifying Gamma, Morningstar arrived at a figure of 1.82 percent per year outperformance for those receiving advice aimed at improving their financial choices. Again, it would seem that advisers are more than earning their fee and that improving decision-making is the primary means by which they improve clients’ investment outcomes.

Research conducted by Aon Hewitt and managed accounts provider Financial Engines also supports the idea that help pays big dividends. Their initial research was conducted from 2006 to 2008 and compared those receiving help in the form of online advice, guidance through target date funds or managed accounts to those who did it themselves. Their finding during this time was that those who received help outperformed those who did not by 1.86 percent per annum, net of fees.

Seeking to examine the impact of help during times of volatility, they subsequently performed a similar analysis of help versus no-help groups that included the uncertain days of 2009 and 2010. They found that the impact of decision-making assistance was heightened during times of volatility and that the outperformance of the group receiving assistance grew to 2.92 percent annually, net of fees. Just as was suggested by Vanguard from the outset, the benefits of advice are disproportionately experienced during times when rational decision-making becomes most difficult.

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Daniel Crosby speaking at FPA Retreat 2016

We have now established that financial guidance tends to pay off somewhere in the ballpark of 2 percent to 3 percent a year. Although those numbers may seem small at first blush, anyone familiar with the marvel of compounding understands the enormous power of such outperformance. If financial advice really does work, the effect of following good advice over time should be substantial. Indeed, the research suggests that very thing.

In their 2012 ‘Value of Advice Report’ the Investment Funds Institute of Canada found that investors who purchase financial advice are more than one and a half times more likely to stick with their long-term investment plan than those who do not. Because of this commitment to a game plan, the wealth discrepancies between families that receive advice and those who do not grow over time. For those who receive four to six years of advice, the multiple attributable to advice is 1.58. Those receiving 7 to 14 years of advice nearly double up (1.99x) their no-advice peers and those receiving 15 or more years of advice clocked in at an overwhelming 2.73x multiple. Good financial advice pays in the short run, but the multiplication of those gains over an investing lifetime is truly staggering.

Hopefully at this point, there is little doubt in your mind that the cumulative effects of receiving sound investment counsel are financially impressive. But as we look beyond dollars and cents, it is worth considering whether there are quality of life benefits to be enjoyed by working with a financial professional.

After all, many people perfectly capable of mowing a lawn, cleaning a home or painting a room hire those jobs out. While you may have lawn mowing skill equal to that of the person you hire, you may still enjoy peace of mind and increased time with loved ones as a result of your delegation. The research suggests that in addition to the financial rewards that may accrue to those working with an adviser, it also provides increases in confidence and security that are no less valuable.

The Canadian ‘Value of Advice Report’ found that those paying for financial advice reported a greater sense of confidence, and more certainty about their ability to retire comfortably and having higher levels of funds for an emergency. A separate study performed by the Financial Planning Standards Council found that 61 percent of those paying for financial advice answered affirmatively to, “I have peace of mind” compared to only 36 percent of their “no plan” peers. The majority (54 percent) of those with a plan felt prepared in the event of an emergency, versus only 22 percent of those without a plan. Finally, 51 percent of respondents with a plan felt prepared for retirement against a frightening 18 percent of those not receiving advice.

Receiving good financial advice pays a dividend that builds both wealth and confidence. The research is unequivocal that a competent financial guide can help you achieve the returns necessary to arrive at your financial destination while simultaneously improving the quality of your journey.

So, do financial advisers add value?

The research strongly supports that they do, both in terms of improving means and quality of life. But they only add value when we know what to look for when selecting the appropriate wealth management partner. Our natural tendencies will be toward excess complexity and flashy marketing, seeking out those who lead with bold claims of esoteric knowledge. What will add much greater richness is a partner who balances deep knowledge with deep rapport. Someone we will listen to when we are scared and who will save us from ourselves; a simple solution to a complex problem.

Daniel CrosbyDaniel Crosby
Executive Vice President, The Center for Outcomes
President, Nocturne Capital
Atlanta, Ga.


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Focus on Purpose: Getting Clients to Follow Your Best Advice

_MG_5050 -h WEBEmphasizing why your clients need to do something may be the key to getting clients to do what you need them to do to better their financial future.

Daniel Crosby, Ph.D. and president at Nocturne Capital, told attendees at FPA Retreat 2016 that one way to strengthen that relationship is to emphasize your value and get clients to follow your best advice.

Crosby said a study he conducted with an unnamed insurance company found that as ultra-high net worth clients age, they streamline their lives. So instead of having three separate financial advisers, they’ll bring that down to one. So now is the time to emphasize your value and strengthen your relationship with your clients so when they’re streamlining their lives, they keep you around.

“You have to know how to compel people to do what you tell them to do,” Crosby said. “You need to have the skills and the tools to get people to follow your best advice.”

Below are some tips to help your clients follow your advice:

The Four Ps
Crosby explained four points to help entice clients to follow your advice: purpose, proficiency, people, process, and purpose again.

Purpose: Remind clients why they need to follow your advice.

“The human mind is designed to look for purpose and meaning,” Crosby explained. Reminding clients of their goals—like showing them a picture of their children or reminding them of their goal to send their children to college—helps keep them on track.

“Open and close every session with the ‘why,’” Crosby said.

Proficiency: Ensure your clients are aware of your credentials and establish your authority. People look for ways to streamline their decision-making process, and if they see you as an authority figure, they will most likely listen better.

People: Leverage social and peer pressure to encourage clients to do the right things. Give them anecdotal evidence using people who are in similar situations who did what you are recommending and had a good outcome, rather than telling them to stop doing what they’re doing.

Process: Give your clients concrete but limited options to choose from. People get overwhelmed when they have too many choices.

“Exist somewhere between asking and telling people,” Crosby said.

Purpose: Close the session by revisiting the purpose.

View Crosby’s presentation here.

Did you miss Retreat this year, or just want to register for 2017 early? Join us next year at Château Élan in North Atlanta, Georgia April 24-27, 2017. Use the code PARET17 for $100 off if you register before May 31, 2016.

AnaHeadshot

Ana Trujillo
Associate Editor
Journal of Financial Planning
Denver, Colo.