Traits of great financial advisors

Crosby_2015-150x150Dr. Daniel Crosby, Chief Behavioral Officer

You probably know by now that you’re supposed to have a financial advisor, you may just not know how to differentiate the good ones from the bad ones. We’d like to suggest the following as a checklist for helping you to find an advisor who can help you meet your financial goals and have a good time doing it.

They will keep you from being your own enemy - The research consistently shows that behavioral coaching is an advisor’s biggest value added, although most clients assume it is the skillful selection of investments. Look for someone you like enough to listen to and trust enough to follow their advice. If they can keep you from making a handful of big errors over a lifetime, they will have earned their fee and more.

They charge an equitable fee - Fees are more negotiable than you might imagine, especially for larger accounts. Good advisors know what they are worth and charge appropriately, but advisors charging exorbitant fees are doing their clients a disservice.

They have a niche – Some advisors specialize in working with small business owners, “women in transition” or those with values-based investment preferences. Whether you are soon to retire, have inherited some “sudden wealth” or are an entrepreneur with a great deal of value in her business, you can and should find an advisor who specializes in your particular needs.

They offer comprehensive services - Some financial professionals offer only planning or investment advice, while others offer a broad range of services. Ensure that what is offered is consistent with your needs.

They have the right credentials – Look for some combination of years of experience, appropriate certifications, and post-graduate education. The CFP is more and more becoming the industry gold standard, but many competent advisors (especially those with many years of experience) may have foregone a credential they don’t see as adding much new value to their business. Rather than looking for specific letters behind a name, ensure that they have a commitment to lifelong learning and self-improvement.

They can articulate their investment philosophy - A clear and concise investment philosophy is a sign of having given this deep thought. A corny sales pitch is a sign that you should run. People with a deep fluency in their discipline can explain what they do to a layperson. People with something to sell will try to convince you that it’s over your head.

They communicate regularly - This should be driven by your needs and preferences. Expect roughly four times per year but be sure to communicate your own expectations about how best to connect and how often to engage.

They offer a unique client experience - You are paying good money for this service and should be treated accordingly. This should include everything from courteous support staff to regular meetings to an ability to ask appropriate questions about the process. Do not be afraid to ask for what you need to be happy and well informed.

They have a succession plan - Someone asking you to think about the long term should have done so as well. It is difficult for some business owners to confront the inevitability of their own departure, but it is a sign of maturity to have done so.

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.

 

6 behaviors that predict future wealth

Crosby_2015-150x150Dr. Daniel Crosby, Chief Behavioral Officer

For many years, the prevailing advisory remuneration model has led financial advisors to look at just one variable – investable assets – when deciding whether or not to work with a client. One widespread truism about human behavior is that what gets rewarded gets done and inasmuch as advisors have been rewarded with a percentage of assets under management, AUM has been the North Star for determining whether or not to work with a client. 

But the simplicity of this calculus has historically caused advisors to overlook those who might soon become rich or those who would be a good cultural fit for the ideals of a practice. After all, a wealthy client that’s a pain to work with may not be so enticing after a few hotheaded visits to the office. The “AUM as sole determinant” model has also excluded groups not stereotypically thought of as having wealth, despite clear evidence to the contrary. Consider the following stats from The Center for Outcomes about two such groups – women and young people. 

  • Women control 2/3 of the total wealth in the US[1]
  • Women are the primary breadwinners in 40% of households[2]

…and yet…

  • More than half (58%) of women defer to their spouse to manage critical, long-term decisions[3]
  • As a result, 70% of women fire their advisor within a year of their husband’s passing[4]

The numbers don’t look much better for young people, either. Consider: 

  • Young people are open to working with their parents’ financial advisors (55 percent), but only 20 percent have met them[5]
  • Just 10% of RIA clients are under 40[6]
  • 86% of children will fire their parents’ advisor[7]
  • 2/3 of those making over $150,000 have no advisor[8]

Clearly, the investable assets model is incomplete, leading us to ignore cultural considerations as well as opportunities for future wealth accumulation. But if AUM isn’t the answer, what is? Dr. Sarah Stanley Fallaw has a suggestion: behavior. Dr. Fallaw, CEO of Data Points, sets forth six behaviors that predict future wealth creation in her fantastic new book, The Next Millionaire Next Door (2018):  

Confidence - “Demonstration of confidence and collaboration in financial management, investing and household leadership.”  

Frugality – “Financial behaviors associated with consistent saving, dedicated commitment to lower spending and rigorous adherence to a budget.” 

Responsibility - “Acceptance of the role of actions, abilities, and experiences in financial outcomes. Belief that luck plays a small part in achievement.”  

Social Indifference – “Spending and saving behaviors that reflect immunity to social pressure to purchase the latest in consumer and/or luxury goods, clothing and cars.”  

Focus - “Demonstration of the ability to focus on detailed tasks through completion without becoming distracted.”  

Planning - “Behaviors related to goal-setting, planning, and anticipating future needs.” 

An exclusive focus on dollars and cents has led the advisor of yesteryear to size up a client simply on how much (or how little) money they have today. The advisor of the future will cast aside this outdated approach, relying instead on an understanding that today’s behavioral realities are likely to lead to tomorrow’s financial success. This behavioral approach reflects a more holistic understanding of what true wealth means, allows the advisor to serve historically underserved populations and ensures a tighter fit between client personality and firm culture. It’s time to stop asking, “What are you worth?” And start asking, “What are you like?”

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.

Sources:
[1] BMO Wealth Institute, “Financial concerns of women” (2015).
[2] BMO Wealth Institute, “Financial concerns of women” (2015).
[3] UBS: https://www.ubs.com/global/en/ubs-news/r-news-display-ndp/en-20190306-study-reveals-multi-generational-problem.html
[4] Smart Women Finish Rich: 9 Steps to achieving financial security and funding your dreams. Bach (2002).
[5] Broadridge: https://www.broadridge.com/press-release/2018/millennials-most-confident-in-savings-accounts
[6] https://www.cnbc.com/2015/01/29/millennial-millionaires-to-be-neglected-by-advisors-study.html
[7] https://www.investmentnews.com/article/20121028/REG/310289970
[8] https://www.cnbc.com/2015/01/29/millennial-millionaires-to-be-neglected-by-advisors-study.html

 

 

Giving advice that sticks

Crosby_2015-150x150Dr. Daniel Crosby, Chief Behavioral Officer

The numbers aren’t pretty. According to a 2016 study conducted by Northwestern Mutual, 62% of Americans do not have a financial advisor of any kind. And while not getting any advice is inadvisable, the numbers are bleak even within the cohort who are paying a professional, with only 40% of those individuals believing that their advisor exhibited long-term commitment and provided tailored attention.

But financial advisors aren’t alone in giving advice that is unequally distributed and unevenly executed. Study after study shows that less than half of Americans seek medical care for an illness, and among those that do visit a doctor, only about half of them take their medicine as directed. The result in both finance and medicine is disheartening: the vast strides we have made end up being truly taken advantage of by less than a quarter of the population. The concerned advisor naturally asks, “Is there more that we can be doing to more equitably distribute this life-changing knowledge?”

A 1970s study of physicians found only 25% of them acknowledged any culpability in patient non-compliance, an attitude that I believe to be widespread among financial advisors today. If we are to begin to address this problem, we must acknowledge as a profession that not all advice is created equal and begin to be students of advice that sticks. As Dr. Moira Somers says in her book, Advice That Sticks, most financial advisors provide good advice that is badly given.

Luckily, an organization no less impressive than the World Health Organization has provided five pillars of “stickiness” for us to consider when designing advice delivery systems for maximum uptake. To increase memorability, these five facets spell out the word FACTS (source: Advice that Sticks by Dr. Moira Somers):

  • Financial history – family money scripts, previous mistakes and successes with money, risk taking capacity, psychological comfort talking about money
  • Advice characteristics - easy or difficult to follow, complex or simple, immediate versus future sacrifices and payoffs
  • Client characteristics – readiness to change, ability to delay gratification, intellectual and emotional maturity
  • Team and advisor characteristics – support for change, level of (or lack of) warmth and acceptance, frequency of follow-up, processes to handle impasse
  • Social factors - default behaviors, level of social support, access to resources, family dynamics, social stigma involved with change

Understanding the five dimensions that good advice considers, I want to provide some practical next steps for those interested in giving stickier advice, many of which are drawn from Dr. Somers excellent book. As you review each of these five pillars, please review the provided checklist and give yourself and your organization a “stickiness score”, looking for ways in which you could improve the execution on your best advice.

Financial history

  • Do I know how this person’s family history impacts their ideas about money?
  • Am I familiar with their past patterns of financial behavior?
  • Have I appraised my client’s level of financial literacy?

Advice characteristics

  • Have I given simple advice that can be implemented with a single behavior?
  • Do I begin each meeting by asking the client about goal progress?
  • Have I asked the client which parts of the advice they might need the most support with?
  • Have I brainstormed with the client how to make the goal easier to achieve?
  • Have I asked the client to commit, out loud, to the desired course of action?

Client characteristics

  • Have I understood the needs of this client and provided bespoke advice?
  • Is this client ready to change or is change being foisted upon them?
  • Are we agreed on the course of action or do we need to discuss further to increase alignment?
  • Have I understood and tapped into their goals and purpose as a source of motivation?

Team and advisor characteristics

  • Are we treating client compliance with our advice as a shared responsibility?
  • Am I delivering advice in a way that is empathic and approachable?
  • Am I talking too much (or listening too little)?
  • Am I being judgmental?

Social factors

  • Have we identified supportive people in their life who can support this change?
  • Are there social sacrifices that will make this change difficult?
  • Is there more than one person at the advisor’s office who can be of service?
  • Can you provide a list of referrals to outside sources that could support the change?

The number of Americans seeking out formal financial advice has risen from just 25% a few years ago to nearly 40% today, and while that number is still far too low, substantial progress has been made. But in addition to increasing access to and awareness of financial advice more broadly, we must ensure that those already within our care are being well served. A great first step in that process is realizing that not all advice is created equal and that there is much that we can do to support those we are masking to make sometimes-dramatic shifts in the way that they move through the world.

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.

Sources:

https://www.thinkadvisor.com/2016/06/21/most-americans-get-no-financial-advice-survey/?slreturn=20190028052749

https://www.amazon.com/Advice-That-Sticks-financial-advice-ebook/dp/B079DSVCJ9

Top blog posts of 2018

It’s time to close out the year with our top five blog posts from 2018. From our perspectives on market volatility to weekly podcasts and even a recap of the mid-term elections, these are the best of 2018. Enjoy!

Crosby_2015-150x150Dr. Daniel CrosbyExecutive Director, The Center for Outcomes & Founder, Nocturne Capital

The do’s and don’ts of market volatility

You will never regret your vacation

A tomorrow more certain than today

Holland_F_150x150

Tim Holland, CFA, Senior Vice President, Global Investment Strategist

Investment Insights Podcast: What’s roiling the market, and where do we go from here?

 

Raupp_F_150x150

Jeff Raupp, CFA, Chief Investment Officer

A quick take on the mid-term elections

 

 

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.

A tomorrow more certain than today?

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

Suppose I asked you what you would be doing in 5 minutes. Odds are, you would be able to answer that question with some high degree of certainty. After all, it will probably look a bit like what you are doing at the time you were asked. Now, let’s move the goalpost back a bit and imagine that I asked you what you would be doing five weeks from now. It would certainly be exponentially harder to pinpoint, but your calendar may give some clues as to how you will be engaged at that time. Now imagine you were asked to forecast your actions five months, five years, or even fifty years from now – damn near impossible, right? Of course, it is because, in our quotidian existence, the present is far more knowable than the distant future.

What complicates investing then, is that the exact reverse is true. We have no idea what will happen today, very little notion of what next week holds, a slight inkling as to potential one-year returns but could take a pretty solid stab at 30 years from now. Consider the long-term performance of stocks by holding periods:a tomorrow more certain than today

Over short periods of time, returns are nearly unknowable. Stocks are up about 60 percent of the time and down about 40 percent of the time, but the highs and lows are both very dramatic. Over a period more reflective of a long-term investment horizon, however, the future becomes far more certain. Returns average just over 10 percent per year, with the worst case being around 6 percent and the best case being nearly 15 percent. Not so scary anymore, but it does require a fundamental rethinking of reality, something that seems not to be happening. As statistician extraordinaire Nate Silver says in The Signal and the Noise:

“In the 1950s, the average share of common stock in an American company was held for about six years before being traded – consistent with the idea that stocks are a long-term investment. By the 2000s, the velocity of trading had increased roughly twelvefold. Instead of being held for six years, the same share of stock was traded after just six months. The trend shows few signs of abating: stock market volumes have been doubling once every four or five years.”

Intuition tells us that “now” is more knowable than “tomorrow” but Wall Street Bizarro World (WSBW) says otherwise. As Silver points out, more access to data and the disintermediary effects of technology make our tendency toward short-termism even greater. But the growing impatience of the masses only serves to benefit the savvy investor. As Ben Carlson says in A Wealth of Common Sense, “Individuals have to understand that no matter what innovations we see in the financial industry, patience will always be the great equalizer in financial markets. There’s no way to arbitrage good behavior over a long-time horizon. In fact, one of the biggest advantages individuals have over the pros is the ability to be patient.”

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

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.

 

Making sense of recent market volatility

This past week has been a very unsettling time for markets and investors. To help inform conversations, Jeff Raupp, CFA, Brinker Capital’s CIO, recorded a podcast that examines the recent market correction, including the catalyst for the sell-off and where we see the market heading into 2019.

Additionally, Dr. Daniel Crosby, Executive Director, The Center for Outcomes & Founder, Nocturne Capital, provides information to better understand market volatility and how to best react to the changes:

We hope you find these tools helpful and appreciate your continued confidence in Brinker Capital.

Brinker Capital, Inc., a registered investment advisor.

45 things smart investors never say

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

1. Fear of political strife – “I don’t like the President”

2. Concentrated position – “My grandfather gave me this stock”

3. Impersonal benchmarks – “Why am I down versus the S&P 500?”

4. Market timing – “Is now a good time to invest?”

5. Home bias – “Europe? I prefer the Red, White, and Blue!”

6. Tangibility bias – “I like to invest in things that I can hold”

7. Friendship bias – “I like to invest in people I know”

8. Anchoring/ “breakevenitis” – “I’ll sell when it gets back to what I paid for it”

9. Selling winners too quickly – “You never go broke taking a profit”

10. Mere exposure effect – “Buy what you know”

11. Zero risk bias – “I’ll keep this dry powder for a rainy day”

12. Performance chasing – “This has been hot…”

13. IPO investing – “Have you heard of this new company…?”

14. Shifting risk tolerance – “I’m a high-risk high-reward person”

15. Ostrich effect – “Why mess with a good thing?” (complacency)

16. Confirmation bias – “All of my friends say…”

17. Overconfidence – “It won’t happen to me…”

18. Hindsight bias – “How did you do in 2008?”

19. Restraint bias – “I’ll jump on the next March 2009”

20. Self-serving bias – “Why aren’t my returns higher?” (two-way street)

21. Affect heuristic – “I’m going with my gut on this one…”

22. Appeal to authority – “But Jim Cramer said…”

23. Status quo bias – “Rebalance? Why bother?”

24. Hyperbolic discounting – “I’ll start saving later…”

25. Gambler’s fallacy – “I’m on a roll!”

26. Herding – “My friend told me to check out…”

27. New era thinking – “Yeah, but this time is different…”

28. Representativeness – “This will be the Great Depression all over again”

29. Bias blind spot – “But I would never do that!”

30. Ambiguity aversion – “Why can’t you just give me a straight answer?”

31. Babe Ruth Effect – “Why did you have me in last year’s big winner?”

32. Dread risk – “I’m gonna buy gold”/ “What about the zombie apocalypse?”

33. Fundamental attribution error – “Why aren’t you beating the market? I could do better myself!”

34. Illusory pattern recognition – “This chart looks just like 1929!”

35. Money illusion – “I’m a millionaire! What do you mean keep working?”

36. Myopic loss aversion – “Excuse me, I have to make some hedging trades.”

37. Sunk cost fallacy – “Well, we’ve already gone this far so…”

38. Turkey illusion – “Recession? Never heard of it.”

39. Fetish for complexity – “I need hedge fund exposure! What am I paying you for?”

40. Declinism – “The way I see it, the world is just going to hell”

41. Framing – “Save 10%? Impossible.”

42. Illusory truth effect (believing a market myth frequently repeat) – “Sell in May and go away”

43. Information bias – “Let me just turn on CNBC”

44. Outcome bias – “You told me not to buy individual stocks and it went up. Ha!”

45. Post-purchase rationalization – “I mean, I NEEDED that.”

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

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.

You will never regret your vacation

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

Bronnie Ware is an Australian nurse who has spent her career in a palliative care unit, caring for those with very little time to live. As someone who interacts with the dying, she has had the privilege of speaking with these people about the things that make their life worth living, as well as what they wish they’d done differently. Ware summarized the top five regrets of those about to pass on in her excellent blog, “Inspiration and Chai.” The “Top Five Regrets of the Dying” are:

  1.  I wish I’d had the courage to live a life true to myself, not the life others expected of me.
  2.  I wish I hadn’t worked so hard.
  3.  I wish I’d had the courage to express my feelings.
  4.  I wish I had stayed in touch with my friends.
  5.  I wish I had let myself be happier.

Notice, not one mention of money and the only mention of work is to say they (especially male patients) wished they had done less of it. If you are like me (and perhaps like most people), you are chasing the wrong dream and setting the wrong goals. As you sit and evaluate your life as it draws to a close, I promise you that you will never regret the year your portfolio underperformed the benchmark, but you may well regret lost time spent living a life that confused money with what matters much more.

The Path Forward
In a money-obsessed world that has socialized us to chase the almighty dollar, it can be weirdly unsettling to learn that money isn’t everything. As much as we whine about money, having something that is the physical embodiment of happiness is nice. We can hold it, save it, get more of it, all while mistakenly thinking that getting paid is how we “arrive.” Realizing that money does not directly equate to meaning can leave us with a sense of groundlessness but once we’ve stripped away that faulty foundation, we can replace it with things that lead to less evanescent feelings of happiness. Breaking your overreliance on money as a substitute for real joy is a great first step, here are two ways to move forward upon having made this important realization:

Spend money in ways that matter – Let’s be balanced in the way we talk and think about money. It’s not the key to happiness, but it’s not nothing either. A lot of our troubles with money stem from the way we spend it. We think that buying “things” will make us happy. We engage in retail therapy which is quickly followed by feelings of regret at being overextended. Before we know it, we’re surrounded by the relics of our discontent; the things we bought to be happy become constant reminders that we’re not.

Instead of amassing a museum of junk, spend your money on things of real value. Spend a little more on quality, healthy food and take the time to savor your new purchases. Use your money to invest in a dream – pay yourself to take a little time off and write that novel about which you’ve always dreamt. Give charitably and experience the joy of watching those less fortunate benefit from your wealth. Finally, spend money on having special experiences with your loved ones. It’s true that money doesn’t buy happiness, but it can do a great deal to facilitate it if you approach it correctly.

Find a new metric – Part of the appeal of money as a barometer for happiness is that it’s so…well…quantifiable. Meaning, joy, happiness, and fulfillment are all abstractions that can be hard to get our hands around. Thus, we aim for something we can count (but end up sadly disappointed). So, take things that really will make you happy and try to come up with metrics for those things instead. Maybe you enjoy painting and you could set a goal to complete three new pieces by the end of the summer. Perhaps you want to be more service oriented and you could set a goal to engage in a charitable act each week. The impulse to measure happiness is a natural and good one, let’s just make sure we’re using a yardstick that delivers on its promises.

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

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.

 

Is there any wisdom in the crowd?

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

“Anyone taken as an individual is tolerably sensible and reasonable – as a member of a crowd, he at once becomes a blockhead.” – Friedrich Von Schiller

I travel roughly once a week to conferences where, in addition to eating overcooked chicken, I am typically asked to speak to financial advisors about the foundations of behavioral finance. As anyone who travels for business well knows, it can be tricky in a new city to try and determine where best to eat, sleep, or watch a show. And while many nice hotels provide a concierge to guide you, the concierge’s advice is ultimately limited by the fact that it is just one person’s opinion. Having been steered amiss more than once by a concierge with a palate less sophisticated than my own (for surely it could not have been MY taste that was in question), I quickly learned to harness the power of the crowdsourced review. Apps like Yelp, Urban Spoon, and Rotten Tomatoes provide aggregated reviews that guide diners and moviegoers to restaurants and films that have received consensus acclaim.

While I may not always agree with the taste of any individual concierge or my local newspaper’s movie reviewer, I have never been disappointed with a movie or dish that has received widespread approval. In things that matter most (i.e., food and movies), there is wisdom in the crowd.

But the power of crowd thinking is not limited to picking out a tasty schnitzel or deciding whether to watch Dude, Where’s My Car? (18% on Rotten Tomatoes) – it is the bedrock upon which the most successful political systems are built. Sir Winston Churchill famously opined that, “The best argument against democracy is a five-minute conversation with the average voter,” a sentiment heard in many forms at election time. So why then has democracy proven to be so successful (or at least not entirely unsuccessful) over long periods of time? Why is it, paraphrasing Churchill again, “the worst form of Government except all those other forms that have been tried from time to time”? The answer is once again in the tendency of the crowd to be more wise, ethical, tolerant, and gracious than the sum of its parts. The alternatives, political systems like oligarchy and monarchy, live and die with the strengths or weaknesses of the few, which is a much higher risk/reward proposition than democracy. The average voter may be unimpressive, but the average of the averages tends to be the best game in town.

wisdom in the crowd2

If crowd wisdom can help us solve complex decisional problems and provides us with good-enough government, it seems intuitive that it has something to offer most investors, right? Wrong. Once again, the rules of Wall Street Bizarro World turn conventional logic on its head and require us to operate from a different set of assumptions.

Why is it then that a qualitative gap exists between investment and culinary decisions? Richard Thaler, behavioral economist par excellence, has identified four qualities that make appropriate decision-making difficult. They are:

  • We see the benefits now but the costs later
  • The decision is made infrequently
  • The feedback is not immediate
  • The language is not clear

Choosing a nice meal consists of clear language (“Our special tonight is deep-fried and smothered in cheese”), immediate feedback (“OMG! This is so good”), is made frequently (3 times daily, more if you’re like me), and has a mix of immediate and delayed costs (“That will be $27” or “I should have quit after three rolls”).

An investment decision, on the other hand, violates every single one of Thaler’s conditions. It consists of intentionally confusing language (What does “market neutral” even mean?), has a massively delayed feedback loop (decades if you’re smart), is made very infrequently (thanks for the inheritance, Aunt Mable), and has benefits that are delayed to the point that we can scarcely conceive of them (36-year-old me can scarcely conceive of the 80-year-old me that will spend this money). The crowd can provide us excellent advice on selecting a meal because it is a decision that is frequently made with results that are instantly known. Conversely, the wisdom or foolishness of a given investment decision may not be made manifest for years, meaning that the impatient crowd may have little wisdom to offer.

As we might expect from Professor Thaler’s research, the crowd gets it all wrong when deciding when to enter and exit the stock market. They enter at the time of immediate pleasure and long-term pain (bull markets) and leave at the time of immediate pain and long-term pleasure (bear markets). In A Wealth of Common Sense, Ben Carlson relates a study performed by the Federal Reserve that examined fund flows from 1984 to 2012. Unsurprisingly, “they found that most investors poured money into the markets after large gains and pulled money out after sustaining losses – a buy high, sell low debacle of a strategy.” Yet again we see that preferring the rules of every day to those of Wall Street Bizarro World means trading cheap emotional comfort for enduring poverty.

Jared Diamond’s book Collapse recounts the story of a people who tried to do what so many investors attempt in WSBW – inflexibly imposing their preferred way of life on an incompatible system. Diamond tells the story of the Norse, a once powerful group of people who left their homes in Norway and Iceland to settle in Greenland. The Vikings, who aren’t exactly known for their humility, doggedly pushed forward – razing forests, plowing land and building homes – activities that robbed cattle of grazable farmland and depleted the few extant natural resources. Worse still, the Norse ignored the wisdom of the indigenous Inuit people, scorning their ways as primitive compared to what they viewed as a more refined European approach to farming and construction. By ignoring the means by which the native people fed and clothed themselves, the Norse perished in a land of unrecognized plenty, victims of their own arrogance.

Like a Norseman in Greenland, you find yourself of necessity in a land with bizarre customs, some of which make little sense. This land is one in which less is more, the future is more predictable than the present and the wisdom of your peers must be roundly ignored. It is a lonely place that requires consistency, patience, and self-denial, none of which come easily to the human family. But it is a land you must tame if you are to live comfortably and compound your efforts. The laws of investing are few in number and easy enough to learn, but will initially feel uncomfortable in application. It won’t be easy but it is surely worth it – and it is all within your power.

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

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.

 

Why outcomes beat fear

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

It seems to be human nature to be fascinated by pathology. Sigmund Freud began his study of the human psyche by outlining how it was broken (hint: your Mom) and the discipline continued down that path for over a century. It was roughly 150 years before the study of clinical psychology was offset at all by the study of what we now call “positive psychology” – the study of what makes us happy, strong, and exceptional. Perhaps it is no surprise then that behavioral finance too began with the study of the anomalous and is only now coming around to a more solution-focused ideal. While a thorough review of the transition from efficient to behavioral approaches isn’t why we are here, it’s worth considering the rudiments of these ideas and how we can improve upon them.

For decades, the prevailing economic theories espoused a view of Economic Man as rational, utility maximizing, and self-interested. On these simple (if unrealistic) assumptions, economists built mathematical models of exceeding elegance but limited real-world applicability. It all worked beautifully, until it didn’t. Goaded only by a belief in the predictability of Economic Man, The Smartest People in the Room picked up pennies in front of steamrollers – until they got flattened.

On the strength of hedge fund implosions, multiple manias with accompanying crashes and mounting evidence of human irrationality, Economic Man begin to give way to Behavioral Man. Behavioral proponents began to document the flaws of investors with the same righteous zeal with which proponents of market efficiency had previously defended the aggregate wisdom of the crowd. At my last count, psychologists and economists had uncovered 117 documented biases capable of obscuring lucid financial decision-making. One hundred and seventeen different ways for you to get it wrong.

But the problem with all this Ivory Tower philosophizing is that none of it truly helps investors. For a clinical psychologist, a diagnosis is a necessary but far from sufficient part of a treatment plan. No shrink worth his $200 an hour would label you pathological and show you the door, yet that is largely what behavioral finance has given the investing public: a surfeit of pathology and a shortage of outcomes.

To consider firsthand the futility of being told only what not to do, let’s try the following.

“Do not think of a pink elephant.”

What happened as you read the first sentence of this section? Odds are, you did the very thing I asked you not to do – you imagined a pink elephant. How disappointing! You could have imagined any number of things – you had infinity minus one option – and yet you still disobeyed my simple request. Sigh. Oh well, I haven’t given up on you yet, so let’s try one more time.

“Do not, whatever you do, imagine a large purple elephant with a parasol daintily tiptoeing across a highwire connecting two tall buildings in a large metropolitan area.”

You did it again, didn’t you?

All feigned anger aside, what you just experienced was the very natural tendency to imagine and even ruminate on something, even when you know you oughtn’t. Consider the person on a diet who has created a lengthy list of “bad” foods. He may, for instance, repeat the mantra, “I will not eat a cookie. I will not eat a cookie. I will not eat a cookie.” any time he experiences the slightest temptation.

But what is the net effect of all his self-flagellating rumination? Effectively he has thought about cookies all day and is likely to cave at the first sign of an Oreo. The research is unequivocal that a far more effective approach is to reorient that behavior into something desirable rather than repeat messages of self-denial that ironically keep the “evil” object top of mind. Unfortunately for investors in a panic, there are far more histrionic “Don’t do this!” messages than constructive “Do this instead”, which is where The Center for Outcomes comes in. At the Brinker Capital Center for Outcomes, we have taken behavioral finance out of the textbooks and are putting it in the hands of advisors where it belongs. By utilizing our empirically-based, four-step process, advisors are given specific tools for communicating with clients in a persuasive manner. Click here to learn how to say “Yes” to outcomes.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice.  

Brinker Capital, Inc., a registered investment advisor.