Morningstar Advisor - August/September 2012 - (Page 8)

Behavior Gap How Much of the Behavior Gap Is Your Fault? By Carl Richards We have a problem. We all know about it, but we still aren’t doing enough to solve it. At this year’s Morningstar Investment Conference, I heard plenty of talk about the Behavior Gap, the difference between the returns of the average investment and the returns of the average investor. We’ve often used this outcome to imply that the gap is the fault of investors. But are we being honest with ourselves? We often blame those crazy investors—you know, the people who try to do things on their own. Then, we blame the clients who call and demand we get them out of the market. I don’t doubt that some of that blame is placed appropriately. Far too often, however, this Behavior Gap is being used as a marketing tool to convince people that they should hire advisors because we solve this problem. But we are part of the problem. In fact, we might be a significant part of the problem. If the majority of the dollars that go into mutual funds are still advisor-controlled, then built into the Behavior Gap data is the fact that we help create it. Morningstar’s Don Phillips calls this issue “the third rail.” It’s something we don’t want to touch. But it’s easy to understand why we’re still part of the problem. We’re the ones who are most likely to be watching CNBC, reading the latest market prediction disguised as research, and telling ourselves that we should be “strategically” reallocating capital. Of course, we can trick ourselves by pretending that we’re doing “tactical asset allocation,” but when the unwashed masses do it, we chide them for trying to time the market. I’ve noticed that anytime advisors gather in large numbers, we start asking each other where the market will go next, what we think about the apocalypse du jour, and how we’re positioning our clients’ money to prepare for it. Aren’t we just as guilty as the masses? The mutual fund/product industry is guilty, too. We were bombarded by its “research” that showed why we needed the latest tech fund in 1999, REITs in 2007, and bonds in 2009. Have you noticed how many alternative investment products there suddenly seem to be? My goal isn’t to hammer our industry. But it’s a topic that I’m bringing up again because we need to have a meaningful conversation about it. We need to admit that we’re part of the problem before we can move on to fixing it. Now is the time to take an honest look at the allocation changes you’ve made over the past 10 years, or even the past three to five years. See any issues? The great thing about our investment behavior is that we have nowhere to hide. There is a record of what we have done, and by extension, the advice we gave. Put on a brave, no-shame, no-blame hat and ask yourself some really hard questions. Then, we can all move on and make the powerful impact we know we want to make in the next 10 years. K Carl Richards, CFP, is author of The Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money. 8 Morningstar Advisor August/September 2012

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2012

Morningstar Advisor - August/September 2012
Letter From the Editor
How Much of the Behavior Gap Is Your Fault?
What’s Your View of the Muni-Bond Market?
A Balanced Life
How to Get to Know EMMA
A Strong, Robust Fund Business
Dividend Investing Abroad
Four Picks for the Present
Investment Briefs
Fund Expenses Through the Decades
Autos on Comeback Track
Lessons From the Muni-Bond Rebound
Municipal-Bond Landscape Shifts
Municipal Bonds 101
A Tale of Two Cities
Unraveling the Mysteries of Money
Small Companies Mean the World to Him
The Chinese Art Market and the Origin of Bubbles
The Myth of the Dumb Investor
Stocks That Can Stand the Heat
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The War on Savers

Morningstar Advisor - August/September 2012