Seth Godin observed in a recent blog that, “In medical school, they spend days teaching people to operate on lungs, and no time whatsoever helping young doctors learn how to get their patients to stop smoking and get vaccinated.” This is a comment that could be applied to financial planners.
For a financial planner, the equivalent of learning to operate on lungs is like learning how to do an estate plan, calculate a tax liability or construct a diversified portfolio. These are important technical aspects of financial planning. The ability to do these are key for a sound financial plan. But just like being able to operate on a lung is very important to physical health, no matter how skilful the doctor, his or her intervention is likely to be in vain if the patient continues to smoke, or doesn’t want to get vaccinated.
Yet, as Godin points out, young doctors do not spend any time learning how to get their patients to stop smoking or get vaccinated. Why? One possible answer is because it is too difficult. Having a conversation with someone about stopping smoking is not easy. It’s a grey matter (excuse the pun), whereas when you operate on a lung it is the world of black or white – cut out the growth if it is there. Learning how to cut something out that you can see is relatively easier than learning how to have a conversation that shifts behaviour, in this case smoking.
The same applies to financial advice. Estate plans and tax calculations are largely black and white. Rules determine their outcome. Portfolio construction has clear principles: the higher the expected return of an asset, the higher the expected volatility. But as with lungs, money is not only black and white. Smoking is like spending too much, saving too little or making irrational choices at bad times. Shifting money behaviour does not have clear-cut rules. Each person’s motivation for their behaviour is unique.
Recognise that developing the skills for difficult conversations is as important, if not more important, than knowing how to do the technical work.
One client may spend too much money because they want to express who they are with expensive clothes. Another person may spend too much money on exciting experiences because they don’t attach value to money or possessions. Constructing a portfolio can have a predictable recipe. Use historical returns, risks and correlations, add a dash of expected returns, throw them into the mixer, in this case an optimiser, and voila you have a portfolio for whatever occasion you deem fit. Getting someone to stop spending too much does not have a predictable recipe.
We all face the continual tension between choices that give us an immediate reward, versus choices that reward us in the future. Our susceptibility to the present bias means that eating chocolate cake today is easier than eating broccoli – at least for most of us. Saving money is like broccoli. Not much appeal for now, but lots of benefit in the future. Having a conversation with your client about this is difficult. As UK financial planner Andy Hart said at the recent HUM SA Conference, “Financial advisors are paid to have difficult conversations with their clients.”
David Kreuger suggests that, “The most important thing we can do to achieve success is to manage our emotions and regulate our states of mind.” When it comes to investing, Kreuger draws on Benjamin Graham’s insight into successful investing: “People don’t need extraordinary insight or intelligence. What they need most is the character to adopt simple rules and stick to them.” How can you help clients do this? Having a documented financial plan is an important start. A financial plan is a way of providing a client with rules for decision-making. But because we are human, this is not enough to make good decisions. We still have to manage that tension between present pleasure and future fit.
We still have to manage that tension between present pleasure and future fit.
Managing that tension means having difficult conversations with your clients. Conversations in which you can challenge your clients not to eat the chocolate cake, and help your clients to behave themselves to better financial health. This is hard work. These are hard skills to learn. The temptation is to stick to the technical. It is easier.
But clients need more than this. Operating on a lung is useful, but only if a doctor can help the patient to stop smoking. Developing a financial plan is useful, but only if you can help a client, “manage their emotions and regulate their state of mind”. The starting point? Recognise that developing the skills for difficult conversations is as important, if not more important, than knowing how to do the technical work.
References:
- Andy Hart, “The Story behind the Story,” Humans Under Management SA 2021 Virtual Conference, 15 September 2021
- David Kreuger, “Your New Money Story: The Beliefs, Behaviours and Brain Science to Rewire for Wealth,” Rowman and Littlefield, 2019
- Seth Godin, “Seth’s Blog: Gift cards, serial numbers and hard technology,” 19 September 2021
