In a recent Morningstar article titled, “Do Investors See Financial Advisors As Behavioral Coaches?“, Samantha Lamas discussed survey results regarding what investors find most valuable about financial advisors. What I found most interesting wasn’t what rated highly, but what rated poorly.
In the survey, Morningstar asked individual investors to rank a specific set of attributes by order of importance. The list of attributes is here:
In particular, many planners (myself included) believe one of the most valuable things we bring to the table is behavioral coaching. In other words, helping investors make better, less emotional investment decisions. It appears investors don’t necessarily find quite as much value there as advisors do. In fact, investors don’t value “Helps me stay in control of my emotions” much at
It’s clear that there is a significant disconnect between what advisors believe they bring to the table in terms of value and what investors are looking for from an advisor. Ironically, due to that disconnect, advisors seem to be marketing
It may be interesting for you to know that as a retirement planner, this isn’t offensive to me nor all that surprising. But I did find it tremendously interesting and spent some time thinking about why this disconnect exists.
I felt that if I could understand this disconnect, it could impact how I interact with clients and prospective clients alike as well as how I might do a better job of marketing my business. As a result, I have two hypotheses as to why I believe this disconnect exists that I’d like to share.
Hypothesis #1: It’s Not Quantifiable
Virtually everything that advisors offer in terms of a list of services has some level of quantitative end value for the client. For example, we can calculate the potential long-term value of Roth conversions. We can understand quantifiably what certain Medicare decisions can mean in terms of premiums saved for you over the long run. You can ascertain the value of various Social Security claiming strategies or even the long-term potential value of hypothetical allocation changes to your portfolio. This list is practically infinite.
But it doesn’t work that way for behavioral advice. I certainly believe it exists as I’ll describe, but we do not know what it means to you as an investor in advance. And frankly, that is what it takes for someone to value a good or service. In other words, how can I evaluate whether the expected value I am going to receive over time will exceed the fees paid? And remember, the key is to be able to understand that potential value in advance! The problem unique to behavioral advice is that the potential value is more or less unknowable. And we don’t like unknowns. But let me tell you a story.
In August of 2011, shortly after I moved to Pittsburgh, I had a conversation with a client that at the time had a portfolio worth approximately $500,000. Around this time, the U.S. had it’s first ever credit downgrade and the European sovereign debt crisis was unfolding. And as you might imagine, “due to those facts,” the market was falling quickly. Eight years later, you probably barely recall this specific time and circumstances but I can assure you it was a scary time. And as always, it was being broadcast as the end of the world.
As you might surmise, this client called me wanting to sell out of his stocks completely and move it all into cash while he waited things out. Surely this was the “double dip” everyone had been calling for. Long story short, after almost two hours of conversation and encouragement, he decided to stay the course. I’ll save you the suspense as to what’s happened since August 2011.
Since that phone call, the S&P has climbed from about 1,250 to about 2,823 as I write this. If he would have followed his own emotional desire to act, it’s anybody’s guess when, if ever, he would have gotten back into the market and what the opportunity cost of that decision would have been.
My point here is, what was the value of the behavioral advice provided? The right answer is we can’t
Additional Notes: To be clear and fair though, the market could have kept falling precipitously and therefore could have worked out horribly. There were quite a few factors unique to the client which encouraged me to help him stay the course - primarily that this investor did not “need” the money at any point over the coming decade. I’ll leave the rest of the reasons
My point is that I personally believe that “behavioral coaching” is valuable but amazingly, the actual value can’t be quantified even via the rear-view mirror as shown above. And anything that you can’t put a dollar amount on is likely to be significantly discounted in terms of what it’s actually worth from the outside looking in.
Hypothesis #2: We Believe We Are Better Investors Than We Actually Are
I think the other primary reason investors don’t value behavioral advice is that we believe we are better investors than we actually are. Despite the data showing time and time again that the average investor loses to the market by between 3%-6% per year, we still take a decidedly biased (positive) view of ourselves. Just take a look at how we rate ourselves in a variety of other fields.
When asked to rank our driving skills, 93% of Americans said they were above average.
Intuitively, we know these can’t be true. This has been called the Lake Wobegon effect - a fictional town “where all the men are strong, all the women are good-looking and all the children are above average.”
Basically, we are blind to our own shortcomings. As for investing, here are average results based on the Dalbar 2016  study:
Full Disclosure: There have been issues raised with the Dalbar study, but given my personal experiences with investors (clients and non-clients alike) across a broad range of conversations, I believe the data is much closer to being right than wrong.
Long story short, if we don’t view ourselves as having “bad investor behavior”, what value would behavioral coaching offer when it comes to the services a financial advisor can provide? Probably pretty close to zero, just as the Morningstar study has implied.
If these two hypotheses weren’t enough, there is still one major problem with the behavioral advice value proposition.
The Advisor Has To Be Able to Stay The Course As Well
Advisors saying they offer behavioral coaching implies that they are not susceptible to bad investor behavior. Given that I see tons of advisors out there peddling performance, their unique investment process or proprietary in-house research as a way to court new prospects, I’d hazard a guess that these charlatans are just as likely to succumb to the behavioral issues as anyone. So, buyer beware when it comes to evaluating an advisor.
At the end of the day though, if you are working with an advisor that you truly trust to keep you on the straight and narrow when the stakes are high, you never know when the time will come that offering real historical perspective and an encouragement to stay the course will make a real difference in your financial life.
Related Reading: Emotions & Retirement Planning
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