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
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

Morningstar Advisor - December 2013/January 2014