Morningstar Advisor - December 2013/January 2014 - (Page 8)
Behavior Gap
What's Your Purpose?
By Carl Richards
As an industry, I think it's worth asking,
"What's our purpose?" It's a question I keep
thinking about because it applies to everyone
from the individual advisor to a fund
manager. It seems particularly relevant when
we consider just how little we're trusted
by the people we're supposed to be helping.
The PR firm Edelman conducted its annual T
Trust
Barometer study for 2013 and asked, "Please
indicate how much you trust businesses in
each of the following industries to do what is
right." On a nine-point scale, financial services
got a 4.5. Think about that. People only trust
our industry to do what's right half the time.
So, what is our purpose? I suspect some will
answer that it's to make money, but I wonder
if that's shortsighted. It seems our real purpose
is to help people meet their financial goals.
However
However, if our purpose is to help people meet
their goals, it's pretty clear we're failing.
The majority of the people we're supposed to
help are facing increasingly important
decisions as many of the social structures we
relied on in the past are going away. Planning
for a reasonable retirement is a good example.
As defined-benefit plans are replaced with
401(k) plans, it shifts the burden to individuals
at a time when people are skeptical of the
financial industry. I'm not arguing about the
pros or cons of either model but simply pointing
out that people really need us. And up to this
point, we've failed them.
Instead of helping people navigate these
increasingly complex waters, we seem dead
set on making things even more complex.
8
Morningstar Advisor December/January 2014
Instead of helping them focus on the simple
tools, we create increasingly complex products
and package them as solutions.
I recently met the founder of a mutual fund
company. By any outward measure, the firm
has been successful. But instead of celebrating,
he felt like he had failed. When I asked why,
he shared that when comparing the returns the
fund has generated with the returns investors
earned, it became clear that the very people
the company is focused on helping, its clients,
aren't benefiting. The fund had outperformed,
but the average investor in it had done a
lot worse due to poor behavior. I reminded him
that investor behavior is not his problem. He
was not impressed: "That's the most ridiculous
thing I've ever heard." He related it to being a
rope salesman. Suppose one day someone
comes in to buy rope. In the course of conversation, you discover he's planning to hang himself
with it. Do you sell him the rope? After all, it is
not your job to control what he does with it.
We aren't doing enough as an industry. The
fact that we're only trusted to do what's right
50% of the time makes that clear. We need to
do better. We owe it to our clients to do more
than sell complexity. So, that just leaves one
question: What will you make your purpose? 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 - December 2013/January 2014
Morningstar Advisor - December 2013/January 2014
Contents
Contributors
Letter From the Editor
What’s Your Purpose?
Working for Gen Y
How to Allocate College Savings
Mobius Looks to a New Frontier
Investments á la Carte
Investment Briefs
How to Manage Bonds for Today and Tomorrow
Cloud Is the New Engine of Growth
Knowing Where to Look
Economic Vulnerability Varies by Country
Factor Investing in Emerging Markets
Following the Rules
Exploring Indexing’s Next Frontiers
Frequent Fliers
Family Blind Spots
Optimal Portfolios for the Long Run
Finding Value in a Pricey Sector
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Emerging-Markets Roller Coaster
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