Morningstar Advisor - April/May 2012 - (Page 8)

Behavior Gap We’re Too Smart By Carl Richards Part of what makes us so good at helping people with money is that we know a lot. It’s this knowledge that allows us to help people untangle their finances and set goals for the future. But I think this knowledge can just as easily trip us up. In Made to Stick, the authors, Chip and Dan Heath, refer to it as the curse of knowledge. How does the curse work? Let’s use a first client meeting as an example. Into your office walk Bill and Mary Smith. Both have college degrees, good jobs, and a mortgage, but the extent of their financial knowledge is setting up a contribution to their company’s 401(k). These are smart people (they came to you, right?) who know that they need to make financial plans, but they aren’t sure where to start. They’ve come to you for help. How do you begin? Do you start by rattling off a list of different indexes, rate of returns, or annual contribution limits? If so, you’re triggering the curse of knowledge. The Smiths are unlikely to be your first clients or your last, and you’re so comfortable with the material that it’s easy to forget that not everyone else is, too. The point, as we learn in Made to Stick, isn’t to “dumb things down,” but to find a “universal language.” Using industry jargon and assuming that the client knows exactly what we’re talking about is a trap we all need to avoid. We know too much, and if we aren’t careful, it shows. As advisors, we need to think back to that first day in class and remember how little we knew and how foreign the words and acronyms sounded. We need to realize that the first meeting with an advisor may very well be the equivalent of our client’s first day in class. Instead of abstract terms, use concrete examples. Don’t start off by talking about a rate of return. Do start by asking about the monthly budget. Talk in terms that are relevant as opposed to some far off future, and you’ll be surprised at how clients respond. You’re talking in their terms, but you’re still getting information that helps you help them. We need to embrace the reality that we may end up being a teacher as much as an advisor. Some people will come to you with more knowledge, some with less, but all will respect you and our profession more if they feel like we’ve treated them with respect. Knowing a lot can be a powerful tool, but like all tools, how you choose to use it can determine your success or failure. K Carl Richards is a certified financial planner who believes the world is a better place when people make smarter decisions about their money. That’s just one of the big ideas he promotes at, where Richards asks tough questions about financial planning and investor behavior. His new book, The Behavior Gap, was published in January. 8 Morningstar Advisor April/May 2012

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2012

Morningstar Advisor - April/May 2012
Letter From the Editor
We’re Too Smart
How Do You Use Alternatives?
Taking the Lead
How to Find Economic Moats
The Beauty of Currencies
No Clarity on Bonds
Four Picks for the Present
Investment Briefs
Performance Chasing, Evaluated
Technology’s Slim Pickings
How Much Is Enough?
The Fear Bubble
Three Traits of a Successful Long-Short Equity Manager
Why Absolute-Return Funds Fail to Deliver
An Economist’s Response to Crises
Undiscovered in Plain Sight
Untangling ETF Tax- Efficiency Myths
Central Banks Driving the Gold Rush
U.S. Industrials Could Add Some Magic to Europe-Weary Portfolios
No-Hesitation Allocation Funds
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The Greatest Story Ever Told

Morningstar Advisor - April/May 2012