Here’s a common scenario for financial advisors: when they have a client who needs to take more risk in order to reach financial goals, but has a very low tolerance for it. Should the advisor build a riskier portfolio knowing that the clients may not be able to handle it, or dial down the risk knowing the clients have a greatly reduced chance of reaching their goals?
Solving The Problem
Financial education can help close the gap. Clients who understand more about investing, markets and how to behave in order to maximize success can make better decisions. If they understand the situation and what they need to do about it, they can handle more risk.
The problem cannot be solved simply by making more information available to clients. There is no shortage of information about investing and personal financial management. The problem is that most of the information is useless to the people who need it.
Most of it falls into one of three categories. It may take the form of academic papers or peer-reviewed articles, which are far too technical for most people. It may be sales literature masquerading as advice. Or it may be the talking-head type of offering, which is generally worthless and usually designed more to entertain than to educate.
To be effective, the information has to be properly targeted to the needs, habits and aptitudes of the audience. Financial information competes with all the other information in the world that is vying for the attention of that audience. So it must be clear and concise. It must be accessible and digestible. It must be credible. If possible, it should be fun and interesting.
But even properly crafted and targeted information cannot entirely solve the problem. That’s because part of the problem is behavioral, not informational. Delivering well-crafted information helps, but you also have to help people change their behavior. That means you have to deliver a different type of information.
People need help stepping outside of themselves and recognizing the tendencies that get them into trouble. The list is very long and has been well-documented by academia and the popular press. But teaching people the long list of behavioral quirks is not the answer. They don’t need a degree in behavioral finance. They need a simple set of rules they can follow to improve their behavior. They don’t need to understand the disease. They need to stop the symptoms.
Advisors As Educators
This is a tremendous challenge, but it’s entirely possible. You can teach soldiers to perform effectively on a battlefield. You can teach athletes to keep their cool in the midst of chaos. You can teach people to overcome all manner of fears, addictions and bad behaviors. There’s no reason it can’t be done in the area of investing and personal finance.
Financial advisors need to be on the front line of this effort. Traditionally, advisors have seen themselves as portfolio managers or financial planners, not as educators. But portfolio management and financial planning only address part of the client’s problem. People need to know how to behave so their portfolios and financial plans have a chance to produce the results they were designed for. They don’t have to learn to be great investors themselves, but they need to have a grasp of what is going on around them. Advisors must teach them.
Scott MacKillop is CEO of First Ascent Asset Management, a Denver-based firm that provides investment management services to financial advisors and their clients. He is a 40-year veteran of the financial services industry. He can be reached at [email protected].