Synthesizing happiness

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes & Founder, Nocturne Capital

On Wednesday, November 9, approximately half of Americans will wake up disappointed. Regardless of which candidate prevails on Election Day, roughly fifty percent of the people that she or he will eventually lead will have voted against them. Those whose preferences were not realized will likely begin a new offensive; painting a dystopian picture of the world to come with President X at the helm. Similar to what John Coyne mentioned on Monday. Markets will crash. Businesses will fail. Wars will rage. The historical precedent is that all of this and more will be the new rallying cry of the vanquished party and it’s easy to imagine that it will only be exacerbated by the ugliness and division that have characterized this contest.

But there is another, more powerful precedent that will have a far greater impact on financial markets than who wins or loses: it is our tendency toward resiliency that exceeds our own expectations.

Imagine I asked you to consider your ability to function in the face of the unthinkable – the passing of a child or partner, a debilitating illness, the loss of a job. Odds are, you would describe yourself as helpless, heartbroken and unable to go on. And while all of the scenarios I’ve just put forth are truly tragic, research suggests that our ability to cope with disappointment and loss are greater than we realize until we are thrust into a moment of trial.

To demonstrate this, I’d like for you to consider two groups that seemingly have little in common – paraplegics and lottery winners. If I asked you whether you would be happier one year out from winning the lottery as Option A and becoming disabled as Option B, you would likely suggest that I was in need of a psychologist rather than being trained as a psychologist. Obviously, we would all hypothesize that one year after the life changing event, lottery winners would be much happier and paraplegics would be much sadder, right? But this is simply not the case.

One year after their respective events, it makes little difference whether you are riding in a Bentley or a wheelchair – happiness levels remain relatively static. So, why is this? We tend to overpredict the impact of external events on our happiness. One year later, paraplegics have found out their accidents were not as catastrophic as they may have feared and have coped accordingly. Similarly, lottery winners have found out that having money brings with it a variety of complications. No amount of spending can take away some of the tough things life throws at each and every one of us. As the saying goes, “wherever you go, there you are.” In much the same way, we tend to project forward to a hypothesized happier time, when we have more money in the bank or are making a bigger salary. The fact of the matter is, when that day arrives, we are unlikely to recognize it and will simply project forward once again, hoping in vain that something outside of ourselves will come and make it all better. Our dreams and our nightmares are never quite as likely as we might assume in the moment and our ability to cope with difficulty as it arrives is far greater than we realize before being tested.

I’m not suggesting that the coming years will be easy, far from it. Humanity’s default setting seems to include plenty of divisiveness and struggle right alongside the moments of altruism. I’m simply suggesting that whatever comes, we, and the institutions that support us, are more capable of coping than we may now realize. Always pithy in his perspective, Warren Buffett said, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression, a dozen or so recessions and financial panics, oil shocks, a flu epidemic, and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

The future may be in doubt but our resolve is not. It has never paid to bet against America and I wouldn’t start now, no matter who is at the helm.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

Another Day, Another Panic. Time To Get To Work

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes & Founder, Nocturne Capital

Earlier this year it was trouble in China, today brings unrest in the United Kingdom, and you can bet that we won’t make it through the rest of this (or any other) year without volatility, uncertainty and worry. At times like this, advisors can become frustrated that the messages of patience and discipline that they teach their clients can be so roundly forgotten. But although it may be natural to despair, financial advisors would do well to remember that it is times like these for which clients enlist their services. Times of fear. Times of uncertainty. Times when they are very likely to do irreparable harm to their portfolios.

The sad fact about human nature is that knowledge counts for very little when we need it most. Dan Ariely has shown that while almost any adult can expound the basics of safe sex, knowledge tends to be overridden by emotion in a moment of passion. Likewise, dieters fail not because they cannot discern which foods are healthy and which are not, but because a doughnut is more soothing than a celery stick on a tough day. And so it goes with the clients of financial advisors who have worked hard to educate their clients about the fundaments of diversification, consistency and perseverance. Your clients likely know exactly what they should be doing, but in a moment like this, they need you to be at your persuasive best to convince them to follow rules they already know to be true.

The Knowing-Doing Gap

My route home from work typically takes me over a winding, hilly pass that is the perfect way to decompress after a long day in the office. Like most of us, I usually drive home more or less unconsciously, but I was recently broken from my trance by a tanker spill that obscured all four lanes of traffic. Searching for a new route, I found myself by the nearest hospital, the largest in the area and an institution with a fine track record.

Passing now between the two main buildings and the monorail that connects them, I saw something most unexpected. There, on a nearby lot, were 13 medical professionals in scrubs – smoking. Doctors and nurses! People who would, upon extinguishing their cigarettes, return to the building and plead with their sick patients to stop smoking. I can say with near-certainty that every one of those 13 professionals knew better and yet they couldn’t help themselves. The official name for this phenomenon is the “knowing-doing gap”, and its effects are powerful and pervasive.

James Choi of Yale found that only 4% of people who wanted to save more actually ended up increasing their savings rates. This sad number was made only slightly less pitiful when would-be-savers made a written plan; 14% were then able to stick with the program. Similarly disheartening is that 30% of medical prescriptions go entirely unfilled and of those that are filled, just over half are taken according to their dosage. In other words, among people who proactively seek out a doctor’s medical advice, most of them do not take it. How then can we as advisors ensure that clients are not only receiving good advice but that they are doing so in a manner that will persuade them to follow the received wisdom?

The Four Ps of Influential Communication

At The Center for Outcomes, we believe in the power of financial advice. We have frequently cited the work of organizations as diverse as Aon Hewitt, Morningstar, Envestnet and Vanguard—all of whom have found that clients that work with a financial advisor handily outperform those who do not. But if good financial advice is capable of adding great value, the persuasive powers of an advisor serve as the ceiling for that value. It is with this in mind that we have created our Persuasive Communication Model. Advisors who attend our two-day seminar receive extensive training in the theory and application of the model, so what follows here is a very brief introduction that lacks the appropriate background. Nevertheless, it is our hope that the skeleton of this model will provide a useful template for you as you have tough conversations with your clients. The four Ps are:

  • Purpose
  • Proof
  • People
  • Process

Purpose – Leading with “why?”

It is human nature to look for and create meaning, and we are far more compelled to act (or not act, in this case) when we understand the reasons behind the behavior. Practically speaking, this means reminding clients of their values and the goals they are trying to meet, both of which would be disrupted by acting in haste.

  • Research says: Karlan, et al. (2010) found that simply reminding people of their previous commitment to act in a certain way increased compliance by 16%.
  • Sample dialogue: “Mr. Smith, you engaged me to help you send your two daughters to college and to retire comfortably with your partner, so I’d like to frame my comments today in terms of how impulsive action might negatively impact your stated goals.”

Proof – Showing expertise

It is understandable that in times of unrest, people want to know that they are being shepherded by a knowledgeable guide. Having now framed the conversation in terms of the client’s values, it is time to show that you are a subject matter expert.

  • Research says: In his excellent book, “Your Money and Your Brain”, Jason Zweig points out that the part of the brain associated with critical thinking actually goes to sleep when someone is listening to someone they perceive to be a financial expert. You quite literally give your clients peace of mind.
  • Sample dialogue: “Your desire to get conservative is understandable from an emotional perspective in light of the recent upheaval. Unfortunately, it’s not consistent with best practices around building wealth. In a study aptly titled, ‘Trading is Hazardous to Your Wealth’, Drs. Terrance Odean and Brad Barber found that the more active someone was in entering and exiting the market, the worse their outcomes tended to be.”

People – Peer pressure for good

As financial professionals, we have a deep understanding of the negative impact of “herding” or the tendency to let the crowd influence our investment decisions. What is less appreciate is that social proof (or peer pressure if you like) is actually a powerful tool in our efforts to influence behavior.

  • Research says: Online shoppers are 63% more likely to make a purchase if it has received positive reviews from their peers.
  • Sample dialogue: Social proof can be demonstrated at the institutional, individual expert, peer and personal level. Dialogue here might draw on research from a vaunted college or other institution, followed by the research of a well-known Nobel Prize winner and concluded with a personal testimonial of why you think the proposed action is best.

Process – Guide, don’t overwhelm

Having now explained the why, what and who of your approach, it is time to talk about how to proceed. Remember, your client is overwhelmed and fearful and the last thing they need is to have their life further complicated.

  • Research says: Fewer choices equal greater action in everything from grocery store samples to 401(k) options. Present two, equally positive options, thereby giving your client a stake in the process but without overwhelming them.
  • Sample dialogue: “As I hope you now see, taking drastic action is inconsistent with your financial goals and the research on best investment practices. That said, I want you to sleep well tonight. As I see it, there are two possible moves we could make. The first would be to do nothing at all, leaving your existing allocations intact and checking in with me as needed to remain calm. A second option would be to move a small percentage of your assets to a “Safety” bucket that would provide for you and your family for 2 years in the event of further volatility. This would allow you to have immediate peace of mind without unduly disrupting our well-thought-out process. What are your thoughts on these two options?”

The work that you do as a financial advisor has a meaningful impact on the lives of the people you serve, but you face an uphill battle. No matter how well-educated and knowledgeable your clients may be, instinctual behavioral urges push them to make poor decisions at precisely the time when they are the most damaging. By utilizing The Center for Outcomes Persuasive Communication Model, it is our hope that you will become even better at the part of your job that research suggests adds the most value – managing clients’ behavior. For a much deeper understanding of how this model can revolutionize your practice, please be in touch.

Sources:
http://www.theatlantic.com/health/archive/2012/09/the-289-billion-cost-of-medication-noncompliance-and-what-to-do-about-it/262222/

http://www.thinkadvisor.com/2016/02/01/why-clients-dont-take-your-advice?slreturn=1466788772&page=3

https://www.amazon.com/Your-Money-Brain-Science-Neuroeconomics/dp/0743276698

http://faculty.haas.berkeley.edu/odean/papers%20current%20versions/individual_investor_performance_final.pdf

https://www.searchenginejournal.com/the-power-of-social%C2%A0proof/21896/

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Stress Management for Financial Advisors

Crosby_2015Dr. Daniel Crosby, Founder, Nocturne Capital

The dictionary definition of stress is, “a specific response by the body to a stimulus, such as fear or pain, that disturbs or interferes with the normal physiological equilibrium of an organism.” But one can scarcely conceive of a more pointless construct to define than stress, because just as the Supreme Court famously said of smut, you know it when you see it. This is especially true of financial advisors, who inhabit one of the most stressful professional roles in the modern corporate landscape.

shutterstock_247024930Health.com named financial advisors to their list of 10 Careers with High Rates of Depression.” A study titled, “Casualties of Wall Street” found that 23% of advisors surveyed had significant signs of clinical depression while another 36% percent showed mild to moderate symptoms. And a study published in the “Journal of Financial Therapy” found that the vast majority of financial professionals surveyed experience medium to high levels of post-traumatic stress in the wake of the 2008 crisis.

So what’s an advisor to do? Well, the tips for managing of stress are often simple and intuitive. So simple in fact, that they may be overlooked by advisors accustomed to a life filled with risk and complexity. Notwithstanding their simplicity, try the tips below to start feeling better today:

Tame technology – The 24/7 availability of technology such as email has done a great deal to increase the stress level of people everywhere. Having a means of being reached at any time by your clients means that you are in a constant state of heightened readiness. Set limits on your electronic availability by turning off or limiting the times of day when you “plug in.” These periods of electronic disengagement will allow you to connect with others socially, exercise, and pursue hobbies, all of which have been proven to combat stress.

Damsel in Eustress – One common misconception is that stress is always the result of negative events. Recently, an advisor was crying in my office, unable to pinpoint the reason for her feelings of anxiety. As I learned more, she revealed that she was overseeing a number of projects at work, preparing for a wedding, and readying herself for a move. Although each of these things was positive, the cumulative effect of all of this positive change was quite stressful. Remember, the body cannot distinguish “eustress” (literally, good stress) from bad stress, so be sure to take a moment to relax, even when things are going your way.

shutterstock_41447092As a Man Thinketh – Too often, we accept the fact that things just “are” and that we have little control over our lives. Viktor Frankl said it best, “Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and freedom.” The things that happen to you can be as positive or negative as you construe them to be. If you choose to interpret life events in an upbeat and optimistic manner, you will position yourself for success in all areas, and achieve that success with calm confidence. For practice, try and think of five positive things to emerge as a result of the most recent economic volatility (e.g., spent more time with family).

Little Comfort – It is a strange paradox that all of the so-called “comfort foods” have the very opposite of the desired effect on stress levels. Caffeine causes elevations in heart rate and respiration that can mimic a panic attack. Alcohol depresses our mood and impairs decision making, and eating fatty foods provides a brief period of pleasure followed by sustained periods of regret and lethargy. While we understand that an evening run or a healthy meal may be advisable, our short-sighted bodies tell us differently in times of stress or sadness. The next time you are feeling down, let your brain drive your decision-making; your body will thank you later.

Fake Out – Have you ever heard the old saying, “fake it ‘till you make it?” Well, it turns out that science substantiates this pithy phrase. In the past, the conventional psychological wisdom was that we felt a certain way, and then exhibited behaviors that conveyed that emotion. Put simply, “I’m happy, therefore I smile.” What more research has found, is that the opposite is also true – “I smile, therefore I’m happy.” Research subjects who were instructed to smile, regardless of whether or not they were actually happy, saw an increase in mood. This recent evidence suggests that being proactive, maintaining a schedule, and acting happy can start to improve a negative mood. It turns out that, some of the times you feel least like acting upbeat are the times it could benefit you most.

The market is extremely volatile right now, but that doesn’t mean that your life needs to be. 2 to 3% of outperformance achieved by those who work with advisors, is predicated on your being an effective behavioral coach during times of uncertainty. It is only as you take steps to manage stress in your own life that you can effectively model the kind of behavior that most benefits your clients.

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of Nocturne Capital, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor

Top 10 Things Smart Investors Never Say

With the market in flux, it’s important to think rationally and practice patience. To accomplish that, here are 10 phrases you should NOT be telling yourself:

  1. I got a great stock tip from a friend of a friend.” – Herding
  2. “This time is different.” – New Era Thinking
  3. “I should have seen the crisis coming.” – Hindsight Bias
  4. “I check my account on the hour.” – Myopic Loss Aversion
  5. “This is can’t miss!” – Overconfidence
  6. “It just feels right.” – Affect Heuristic
  7. “…but Jim Cramer said…” – Appeal to Authority
  8. “Rebalance? Why bother?” – Status Quo Bias
  9. “I’m on a hot streak right now!” – Gambler’s Fallacy
  10. “I can always start saving later.” – Hyperbolic Discounting

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of Nocturne Capital, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor.

Three Action Steps for a Black Monday

Crosby_2015Dr. Daniel Crosby, Founder, Nocturne Capital

By now you have no doubt heard about what is (sensationally) being referred to as “Black Monday.” Up over 60% YTD just a few short months ago, China now sits in negative territory for the year. Greece and Puerto Rico continue to weigh on investors’ minds and American markets invoked Rule 48 this morning, a seldom-used provision that allows market makers to suspend trading in an effort to smooth volatility and assuage panic.

With bad news seemingly everywhere and situated at the end of a long-in-the-tooth bull market, it’s not hard to see why investors are rattled. But at times like this, it behooves investors to take a deep breath and rely on rules instead of emotions. To assist you in this difficult time, I’ve prepared a handful of “do’s” for worried investors, with the “don’ts” to follow in my next post.

Do Know Your History – Despite what political pundits and TV commentators would have you believe, this is not an unusually scary time to be alive. Although you’d never know it from watching cable, the economy is growing (slowly) and most quality of life statistics (e.g., crime, drug use, teen pregnancy) have been headed in the right direction for years! Markets always have and always will climb a wall of worry, rewarding those who stay the course and punishing those who succumb to fear.

Warren Buffett expressed this beautifully when he said, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” Such it has ever been, thus will it ever be.

Do Take Responsibility – Which of the following do you think is most predictive of financial performance: A) market timing B) investment returns or C) financial behavior? Ask most men or women on the street and they are likely to tell you that timing and returns are the biggest drivers of financial performance, but the research tells another story. In fact, the research says that you – that’s right – you, are the best friend and the worst enemy of your own portfolio.

Over the last 20 years, the market has returned roughly 8.25% per annum, but the average retail investor has kept just over 4% of those gains because of poor investment behavior. What happens in world financial markets in the coming years is absolutely out of your control. But your ability to follow a plan, diversify across asset classes and maintain your composure are squarely within your power. At times when market moves can feel haphazard, it helps to remember who is really in charge.

Do Work with a Professional – Odds are that when you chose your financial advisor, you selected him or her because of his or her academic pedigree, years of experience or a sound investment philosophy. Ironically, what you likely overlooked entirely is the largest value he or she adds—managing your behavior. Studies from sources as diverse as Aon Hewitt, Vanguard and Morningstar put the value added from working with an advisor at 2 to 3% per year. Compound that effect over a lifetime, and the power of financial advice quickly becomes evident.

Vanguard suggests that the benefit of working with an advisor is “lumpy”, that is, the effects of working with an advisor are most pronounced during periods of volatility (like today). They go so far as to break out the impact of the various services provided by an advisor, and while asset management accounts for less than half of one percent, behavioral coaching accounts for fully half of the value provided by working with a professional. Today is the day your financial advisor earns their keep. Don’t be afraid to reach out to your advisor during times of fear and seek reassurance and advice. After all, they are the one’s saving you more money by holding your hand than by managing your money!

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of Nocturne Capital, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor