Tag Archive for: personal finance

Advertising makes you stupid–even if you’re smart or rich

Highly educated and wealthy investors make dumb mistakes.

This is my oversimplified take on one section of “Mutual Funds: Advertising, Behavioral Models, and Investor Choice,” an article by John Haslem, which appeared in the Spring 2011 issue of The Journal of Index Investing.

“There is a strong positive relation between advertising and investor dollar allocations,” says Haslem’s article, which appears to be a review of other authors’ literature on his topic.

Smart and rich, yet dumb

Advertising emphasizes past performance and rarely discusses fees outside the fine print, so this provides a backdrop to Haslem’s assertion that

  • Highly educated and wealthy investors underweight fund fees and give more attention to past performance.
  • Financially savvy investors underweight fund fees
    and give more attention to short-term performance.

Surprising, isn’t it? You’d think that wealthy investors would take the time to educate themselves and that highly educated investors would understand the importance of expenses to fund returns.

To dig below the surface of this finding, read the source cited by Haslem: Ronald T. Wilcox’s “Bargain Hunting or Star Gazing? Investors’ Preferences for Stock Mutual Funds,” The Journal of Business (October 2003).

Financial writer’s tips

  1. If you’re a financial blogger or newsletter writer, the provocative assertions in Haslem’s article would make a great takeoff point for an article.  For example, you could share how your experience compares.
  2. The Finance Professionals’ Post, published by New York Society of Security Analysts (NYSSA), is a good place to find tidbits to inspire your writing. I found Haslem’s article in the blog’s “Recent Research: Highlights from March 2011.”
  3. If you’re an NYSSA member, you can pick up more writing tips when I speak on “How to Write Investment Commentary People Will Read” on April 28. It’s FREE for NYSSA members.

Financial advisor prescription by Statman evokes strong response

“Teaching clients the science of human behavior” is how financial advisors can help clients to overcome the fears that prompt bad decisions, writes Meir Statman in “Client fears and financial advisor services,” his guest post on my blog.

That may be easier said than done. As financial technology blogger Bill Winterberg said, “For a minority of clients, I think teaching the science of behavior may work in changing habits, but for the overwhelming majority, primitive survival instincts are seemingly impossible to counteract.”

I asked some experts–Rick Kahler, Justin Reckers, and Kathleen Burns Kingsbury–to contribute brief reactions to this controversy. Here are their responses.

Kahler: Partnering with a financial psychologist helps

Based on my experience with financial psychology, it is doubtful that all it would take for most investors to change their financial behaviors when feeling fear is more information about how the brain works. While more information will be enough for some investors to change their destructive, it really won’t help the majority.

Changing harmful financial decisions is similar to changing the behavior of any addiction. More information on alcoholism won’t be enough to change the destructive behavior of most alcoholics. Knowing you have a drinking problem is certainly the first step, but “knowing” isn’t “doing.” The same principals go for over-eaters or over-spenders. More information is rarely enough.

It takes a deeper “re-wiring” of the brain to create new neuropathways to change the manner in which we respond to difficult emotions, like fear. There are many tools available to help people do this, the most well-known being various forms of psychotherapy and group psychotherapy.

This is an example where a financial planner who partners with a financial psychologist can have such a positive impact on hurtful financial behaviors.

Rick Kahler is president of Kahler Financial Group in Rapid City, S.D. He writes the Financial Awakenings blog and is a pioneer in the evolution of integrating financial psychology with traditional financial planning profession.

Reckers: Professionals who work directly with clients will make the practical breakthroughs

I think an understanding of the science of human behavior is valuable in any setting. I do not believe “teaching clients the science of human behavior” will do much to counteract economically “irrational” behavior in financial decision-making. This is especially true when the decisions are made in the midst of emotions like fear or greed. Emotional biases are difficult if not impossible to dispel. They often require an advisor to adapt their own behavior to help work with the client’s emotional decision-making rather than try to change them. Advisors must remember that the fear exhibited by their clients is a reflection of the individual’s financial reality. I agree with Statman when he says “the fear of clients is normal.” I also believe one of the most important functions of an investment advisor is to help clients make fully informed decisions whether beset by fear or not. So I do not think the term characterizes what we should be concerned about. We will return to bull market territory and the emotions with which advisors contend will shift from fear to greed.

The real revolutionary contribution to Behavioral Finance will be a framework for advisors to apply concepts while working with clients. This framework will be developed by professionals who actually work with clients. The contributions of Statman, the Libertarian Paternalism of Thaler, the Heuristics of Kahneman & Tversky, the experiments and research of Ariely and so on, are amazing, important and exciting. But they mostly miss the next step: application to real individual lives. (Note: I have not read Statman’s book in its entirety. I will.) Otherwise we are left to contemplate whether “teaching clients the science of human behavior” will make any difference in how they actually behave at the moment of truth. I believe calculated interactions, interventions and nudges are necessary to truly have a positive effect on the financial decision-making of our clients.

Justin A. Reckers CFP, CDFA, AIF, is director of financial planning at Pacific Wealth Management. He writes with clinical psychologist Robert Simon, Ph.D., in the Practice Builder section of www.MorningstarAdvisor.com and on their blog www.BehavioralFinances.wordpress.com

Kingsbury: Rationality vs. “Fight or flight” response

Meir Statman’s prescription for financial advisors is right on the money.  Clients do react, and often overreact, when emotions are involved in financial decision-making.  Numerous behavioral finance experiments, some mentioned in Statman’s blog post, show how rational thought is overruled by a desire to minimize the pain of a financial loss.

Neuroscience tells us that the brain actually processes financial losses differently than gains. This results in clients experiencing the anticipation or actual pain of loss three times more than the joy of a financial windfall.  Scans of the brain tell us that the limbic system, normally accessed during sudden or traumatic events, is used when facing a potential loss. In contrast, the frontal lobes, the part of your brain where rational thought and executive functions,  processes financial gains.  By knowing this science and educating clients about it, financial advisor can help counteract the fight-or-flight response when fear is part of the equation by offering rational, longer-term solutions.

Understanding behavioral finance and the human side of financial advising is paramount to offering client-centric services.  Not only will this knowledge help the advisor in guiding his client, it will empower the client to understand his own psychology and use the advisor more effectively.  Like it or not, all of us are flawed, emotional human beings.

Kathleen Burns Kingsbury is founder and CEO of KBK Wealth Connection, a company passionate about helping financial services professionals and their clients master their money mindset through wealth psychology. She is the author of a new audio program called Creating Wealth from the Inside Out.

“Escrow Accounts: What’s the Deal?” My article for HouseLogic.com

Does your escrow account ever cross your mind? Probably not. But forgetting to monitor it can lead to lost money and a big headache. Read the rest of my article about escrow on HouseLogic.com, the website of the National Association of Realtors®.

Also, if you’re looking for a writer to interview your investment or wealth management professionals and then write an article that will appear with their bylines, please contact me. I enjoy ghostwriting!

A financial advisor’s "Cure for Money Madness"

People are too obsessed with money and need to get over their irrational beliefs about it, so they can focus on living their lives. That seemed to be the main point of Spencer Sherman’s March 19 talk to the Wharton Club of Boston. Sherman is the author of The Cure for Money Madness.

Sometimes it takes a life-threatening experience to make your aware of your money madness. Take the case of Sherman’s friend Billy, who went swimming by himself off a Hawaiian beach. He panicked when he got caught in a riptide. Instead of swimming parallel to the shore, as experts recommend, he headed straight for the beach. Billy thought his life was over. His last thought before he was rescued? “At least I don’t have to worry about my finances any more.” Finally, Billy put his money into perspective.

Your irrational feelings about money, which are rooted in your childhood, spur you to make mistakes, said Sherman. For example, you may feel that your self-worth depends on your net worth. So you may “buy high and sell low” instead of the more desirable “buy low, sell high.” 

Sherman mentioned some techniques for developing a more rational approach. For starters, think about how you’d advise a friend who’s in your situation because it’s easier to be rational about someone else’s money. Would you advise her or him to buy this stock, build this addition to the house, or take this job? Sherman’s book has a section devoted to exercises and he offers presentations and free conference calls on money madness

One of Sherman’s suggestions surprised me. He’d like us to ask ourselves “How can we make our current financial situation the goal?” I’m so accustomed to financial advisors focused on growing their clients’ wealth instead of finding satisfaction now. Ironically, he said, when we stop striving for more, we see the possibilities in what we’ve got. The idea of making the most of what we’ve got seems very appropriate today. 

I liked Sherman’s exercise for adjusting to less wealth.
1. Together with your spouse or significant other, write down your spending intentions for 2009.
2. Figure out how to create a great life within the limitations of those spending intentions.
3. Cut your 2009 spending intentions by 25% or even 50%. Get creative about working within those limits. For example, instead of eating out, you could organize potluck dinners and spend more time with family and friends.

If you’re intrigued by Sherman’s approach, check out his website or one of his YouTube videos.

Investing in strangers’ human capital

Family wealth advisors say you should invest in your family’s human capital. But what about investing in the human capital of strangers?

The “human capital contract” is coming to the U.S., according to “Betting on Bob” in today’s Boston Globe. How does it work? Writer Rebecca Tuhus-Dubrow explained that “…investors agree to cover the costs of college or graduate school in return for a percentage of the students’ future earnings over a fixed period of time.”

A U.S. company called My Rich Uncle tried, and then abandoned this approach, wrote Tuhus-Dubrow. Human capital contracts have been used outside the U.S. by Lumni, which is starting to apply it here, and Career Concepts of Germany.

According to “Popping the Tuition Bubble,” an article published on the American Enterprise Institute’s website by Frederick Hess and Kevin Carey, “…the smart money would go hunting for bigger returns at less expensive colleges that add great value. After all, other things equal, an investor fares much better by lending a student $48,000 over four years and collecting 4 percent of his or her future earnings than by lending that student $180,000 and collecting the same 4 percent.”

Human capital contracts could help students in this economic crunch. But do they make sense as an investment? What do you think? Please leave a comment.

Build your team–and your client base–with book clubs

You can train your staff using a book club, suggests Kirk Hulett of Securities America Inc. in “Move Over Oprah,” published in Practice Management Solutions (Nov./Dec. 2008).

Hulett got me thinking. How about running a financial book club for your clients or prospects? It could deepen your relationship with them as you learn more about what makes them tick.

Fidelity writes good headlines for volatility

Dealing with market volatility is a full-time job.
For us. Not you.


The headline copied above works. It got me to pick up a brochure about the Fidelity Portfolio Advisory Service.

Why does it work?

First, it raises the reader’s anxiety with “dealing with market volatility is a full-time job.” But that isn’t enough. The brochure quickly offers a solution: Fidelity will handle volatility for you.

Consider trying to apply this model to your written communications.

Susan B. Weiner, CFA

Check out my website at www.InvestmentWriting.com or sign up for my free monthly e-newsletter.

Copyright 2008 by Susan B. Weiner All rights reserved

What Jason Zweig does right–and wrong–in his inaugural column

Stop Worrying, and Learn to Love the Bear.”

I love the title of Jason Zweig’s inaugural “The Intelligent Investor” column for The Wall Street Journal. With this title, Zweig follows advice I give to writers of investment commentary. He takes something that’s viewed as negative and finds the positive side. That’s a great way to grab your reader’s attention.

Zweig says, “…if you are still in your saving and investing years, a bear market is a gift from the financial gods — and the longer it lasts, the better off you will be. Instead of running from the bear, you should embrace him.” So that’s his thesis. 

But Zweig falls short in explaining how the bear market will help investors, other than offering the opportunity to buy good stocks cheaply. He gives the example of how the last long bear market—1969-1982—set the stage for stocks to return 18.5% a year for the 18 years following the bear market’s end.

Let’s assume—and it’s a big assumption—that scenario will repeat. Then, sure, folks who are just starting their saving and investing would end up better off. But what about those who are in the midst of their saving and investing? Will they ever make up their losses?

Use personal stories in your communications

“In a sea of competition, you’ve got to capitalize on what makes you unlike anyone else.”

This advice from “Feel Great Naked: Confidence Boosters for Getting Personal” is aimed at bloggers. The author urges them to share personal stories. But it also applies to financial advisors, especially solo practitioners or small firms, when you communicate with your clients and prospects.

Sharing your personality—and even a bit of your personal story—can help you connect with your clients.

One advisor’s personal story

For example, in a sales letter, one salesman shared his story of how his family had suffered needlessly because of an estate planning mistake. That mistake fueled his passion for bringing new clients to his firm. After sharing that story, the letter shifted to discussing the benefits his firm could offer his prospects.

I’ll bet that personal story prevented some prospects from dropping the salesman’s letter into their wastebaskets.

Sharing your personal stories to connect

Don’t focus your communications exclusively on yourself. Ultimately, your client or prospect will care more about the WIIFM (“what’s in it for me”). But a bit of sharing can create a connection that goes deeper than dollar and cents.

Any financial advisor can heed this advice in one-on-one meetings. It’s more challenging when you work for a large firm and you get into written communications. There’ll probably be a company-wide communications policy that sets an impersonal tone. This gives an opening for advisors with smaller firms to outmaneuver their colleagues at larger firms.

Have you tried taking a personal tack? I’d like to learn what your experience has been.

If you enjoyed this post, you may also enjoy my two-part series on “How to add personality and warmth to your financial writing.”

NOTE: I updated this post in Jan. 2017.


Image courtesy of Master isolated images at FreeDigitalPhotos.net.

Morningstar Market Barometer, 2003-2007

Want to show your clients how equity styles and sectors perform differently over time?

The newly released 2-page Market Barometer from Morningstar can help.