Morningstar Magazine - April/May 2018 - 35

EXHIBIT 1

Four Factors of Financial Behaviors Studies have shown that future concept
and financial literacy have positive effects on financial habits. Materialism and
impulsiveness have negative effects.

Future Concept

POSITIVE EF F ECT

Impulsiveness

NEGATIVE EF F ECT

Materialism

NEGATIVE EF F ECT

Financial Literacy

POSITIVE EF F ECT

Positive Financial Habits
and Behaviors

Source: Morningstar.

that knowledge, then our focus is best placed on
these other influences.
Note: The number of funds is scaled to
In
2014, before working at Morningstar, I
100 in each five-year period.
conducted a study designed to compare the
relative impacts of several factors on financial
behavior.⁴ The goal of the study was to learn
whether or not psychological factors had a greater
impact on behavior than knowledge.

In this study, based on numerous previous works,
we chose to measure the effects of financial
literacy, materialistic values, impulsiveness, and
one's conceptualization of the future ( E X H I BI T 1 ).
We then compared the effects of all four factors
on self-reported financial behaviors.
First, we saw a result that was similar to the
results in the meta-analysis. The effect size of
financial literacy was small but positive, consistent
with the findings of previous studies.
However, while financial literacy was positively
associated with good financial habits, other factors
were also significantly related to behavior.

The relative magnitude of the effect sizes is what
really matters here, and what we found was
that other factors had effect sizes that were similar
to, and often greater than, financial knowledge. In
other words, someone who has a lot of
knowledge but is also highly impulsive, or thinks in
the very short term, may still exhibit bad
financial habits because knowledge on its own
is not enough.
These findings support the idea that people's
financial habits are influenced by a lot more than
knowledge. Impulsiveness, future thinking,
materialism, and other factors play into the
decision-making process as well. What this means
for advice-givers is that if these other factors
are not addressed, financial knowledge may never
translate into action.
How Coaching Can Help

The concept of coaching is different from
financial-literacy teaching, though some elements
overlap. Teaching is about knowledge transfer,
while coaching is about action and skills. Teachers
may lecture and assign work, but coaches

are right there with people as they make their
attempts to excel.
The analogy of a fitness trainer may be especially
apt here. Fitness coaches do not lecture for weeks
on nutrition, muscle groups, and metabolism.
Instead, they offer real-time advice and feedback
on a person's posture, technique, and diet.
Coaches have deep knowledge of many things, but
their job is not to teach all of their knowledge
to the one being coached. Instead, they offer just
enough information for the task at hand and use
the events of the moment to train the person being
coached into developing positive habits over time.
As other articles in this issue mention, a behavioral
coach might help clients to understand their
own decision-making biases, help them overcome
the inevitable obstacles that emotions and
cognitive biases bring to the mix, and challenge
them to focus on how their own behavior (more so
than the market's behavior) affects their ability
to meet their goals.
With this in mind, here are some ways advisors
can practically coach client financial behavior:
1 Take a Just-in-Time Approach to Teaching Clients

Memory retention research shows a clear pattern
of knowledge decay over time ( EXHIBIT 2 ). The
rate of memory decay is exponential, meaning that
it drops off extremely quickly.
Because knowledge retention follows this
exponential decay curve, it is best to offer
important information just before it needs to be
applied. In many ways, good advisors apply
this rule intuitively. Information about the purpose
and merits of annuities might fall on deaf ears
if clients are focused on building a family, but
when they approach retirement, and are curious
about how to deploy their assets to ensure a
stable income, they will make far better students.⁵
A few other examples of how to perform
just-in-time education are:

4 Newcomb, 2015
5 Fernandes, Lynch, & Netemeyer, 2014.

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Table of Contents for the Digital Edition of Morningstar Magazine - April/May 2018

Contents
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Morningstar Magazine - April/May 2018 - Cover2
Morningstar Magazine - April/May 2018 - 1
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Morningstar Magazine - April/May 2018 - Contents
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