Morningstar Advisor - April/May 2013 - (Page 8)

Behavior Gap The Pursuit of Happiness and Financial Advice By Carl Richards When it comes to giving financial advice, it’s very easy to get caught up in the numbers. How much can your clients save? How long until they retire? And just how much do they plan to spend in retirement? I think it comes from a desire to feel certainty in an uncertain world, and it got me thinking about this quote from Viktor Frankl: “It is the very pursuit of happiness that thwarts happiness.” What if this advice applies to other things, too? For example, what if our pursuit of precision to reduce uncertainty creates the exact opposite effect? What if instead of making our clients feel better, our obsessing with precision only makes them feel more anxious? I remember a time when the markets had been really wild. The bad news was everywhere, and I thought it made sense to call a client to reassure him that he’d get through this rough patch. Giving myself a pat on the back for being proactive, I gave him a call. “Hey Dan, I just wanted to check in and make sure you weren’t losing any sleep over the news about the market.” My client: “What news? What are you talking about? Is something wrong? Should I be worried?” I genuinely thought my call would help him. I’d embraced the notion that precision (“I know what’s going on in the market”) mattered most to my client. So, it was incredibly frustrating to discover that I’d only made him 8 Morningstar Advisor April/May 2013 feel more uncertain about his situation. I suspect you’ve gotten a taste of this, too. Here’s the thing. I understand the desire to reduce uncertainty (Monte Carlo simulations, anyone?), but I have to wonder if clients don’t already know that absolute certainty is a fairy tale. I think that people have an intuitive understanding that a good financial advisor will help them make incredibly important decisions. But we aren’t fortunetellers with crystal balls. In fact, those decisions may need to change in the future. As advisors, we need to be as clear as possible that many of those decisions will require that we make some assumptions, maybe even outright guesses. Plus, by being open and honest about those assumptions, we create an opportunity to have the conversation that I think matters a lot: talking about the process of planning and investing. By talking about the process, we help our clients work through what matters most to them. It’s one of the best ways I know to reduce anxiety even though it has nothing to do with precision. Don’t let your pursuit of something—whether it’s precision, certainty, or some other unattainable goal—get in the way of doing the work that really makes a difference to clients and their happiness. K Carl Richards, CFP, is director of investor education for the BAM Alliance and author of The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money.

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2013

Morningstar Advisor - April/May 2013
Contents
Contributors
Letter From the Editor
The Pursuit of Happiness and Financial Advice
What Strategies Do You Use to Control Risk?
Driven to Succeed for Clients and Family
How to Assess a Portfolio’s Bond Risk
Luck, Skill, and Investing
Investments á la Carte
Investment Briefs
Investing’s No- Brainers Have Costs
A Defensive Ride
Risk On/On Risk
The Risk of Being Overconfident
Year of Living Dangerously
The Risk-Parity Approach
A Guide to Mutual Funds Running Risk-Parity Strategies
What Moats Tell Us About Risk
Risk’s Wake-Up Call
Seeing Is Believing
Why Investors Lag the Returns of Their Funds
Liquidity Signals
Pump Them Up
Golden Oldies Keep on Truckin’
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Our Social Blind Spot

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