Financial Advisor contributor Paul Ellis recently interviewed Sarah Newcomb, Ph.D., behavioral economist at Morningstar, to discuss her research with financial consumers and investors.

Ellis: Sarah, you’ve written a report recently, titled “When More Is Less: Rethinking Financial Help.” Tell the advisors who subscribe to Financial Advisor magazine what you discovered in that research with financial consumers and investors. 

Newcomb: I did a number of focus groups with financial advisors over several months, and in every session I requested the same information: “Tell me about the times when you sit with clients, and you find yourself thinking ‘This is an emotional issue, not a financial one.’” I wanted to learn what trends might emerge.

We know that financial behavior has more to do with the stories that we tell ourselves than the numbers, and we know that motivating behavioral change is not just about showing someone a prospectus or a solid plan. That works with our rational mind, but it doesn’t really work with our human mind.

My perspective on financial management is that we need to make it more human. We don’t need to make ourselves less human, we need to make money management more human. I wanted to learn what themes might be emerging for advisors so that I could take those back to the literature and exploratory research and find out, based on what the real need is, what can we do to address that need.

A couple of themes emerged. First, it seems that every advisor has at least one client, probably more, that are financially sound but completely ruled by anxiety when it comes to their money. The problem is that there is no number that puts their mind at ease. There’s never going to be enough. I think that gets at the biggest assumptions in the financial advice industry, and I really want to challenge them. The assumptions are that more is always better and that a financial advisor’s job is solely to help the rich get richer.

I don’t think that is the goal. I think the goal is to help people get healthy around money issues. For people who are wealthy, but not well emotionally, any financial algorithm out there is going to tell you that they’re in excellent financial health. But I disagree. And I think that we do them a disservice if we don’t address the emotional side of money management. This assumption that more is always better comes from an assumption that as wealth increases, peace of mind and life satisfaction will automatically increase. But my research shows that that’s not true. They’re correlated, but they’re not as strongly correlated as other factors.

I did a study in early 2017 based on the findings from those focus groups. I was looking for what factors from psychology advisors can incorporate into their practice. The ideas need to be efficient, effective and ethical. Efficient, because none of us have time to waste. Effective, means what you can actually have an effect on. It doesn’t matter what personality types tend toward certain money management styles if you can’t have any effect on that. I’m trying to identify the psychological factors in which we can make a difference that also affect people’s financial decision making.

What this newest research shows is that when it comes to economic well-being, the largest psychological factor is how far ahead somebody is thinking in time. This has a much larger effect than any of the demographic factors like income, age, education or gender.

Ellis: That was one of two things you ended up focusing on in this study.

First « 1 2 3 4 » Next