During one of my Navy tours I was part of an F/A-18 Hornet squadron. This is a story from that time about how people can react emotionally to money issues.
We were underway on the carrier and the pilots who flew into harm's way were getting combat pay. It wasn't much, but a little something extra to compensate them for the increased hazard of their mission. The Navy's role was limited, so not all of the pilots were getting sorties across the magical line in the sky that triggered the extra pay. It looked like we would be sailing to another part of the world before all of them did. When the squadron's Executive Officer, a fine gentleman full of wisdom and good sense, realized not all of the pilots were going to be eligible for this extra money he called a meeting of the Officer's Mess. Once gathered he proposed that anyone who received the extra pay should donate it to the Officer's Mess so we could have a grand party for all of our families when we got home. A seemingly harmless suggestion based on a sense of fairness.
By the reaction in the room you would have thought he had pulled out a pistol and threatened us at gun point.
The pilots who had already earned that money felt like they were being robbed. Those of us who had not earned that money (the other pilots and the 'ground pounders' like myself who didn't fly) were also aghast at the notion of being given something we hadn't earned at our friends' expense. The Commanding Officer quelled the rising mob with a phrase I'll never forget: "Money is an emotional issue".
And so it is.
Money means many things in our society. Money represents success (or failure), security (or insecurity), and opportunity (or constraint).
Consequently, there are not many things in life that influence our emotions as much as money. It can make us happy, sad, angry, fearful, satisfied, discontented, jealous – the entire spectrum of human emotion.
The fact that money can influence how we feel also influences how we feel about money. It influences how we use money. Financial planning is about the effective and efficient use of money, and our emotions can sometimes interfere with that. It is essential we understand our emotions with respect to money. To the greatest extent possible, they need to be accounted for within the financial planning process.
People are all different and this uniqueness extends into financial planning. One size does not fit all. We can derive a mathematical solution providing a person with the highest statistical probability of achieving their financial goal, but if it doesn’t feel right to them it is unacceptable. It has to feel right.
Financial planning isn’t about the accumulation of wealth, it is about increasing our quality of life. You must be comfortable with your financial plan, which means it must meet your emotional needs as well as your financial goals. Those two things – financial goals and emotional needs - are hopelessly intertwined. You should not sacrifice your emotional needs for your financial goals. Your life will not be better for it if you do.
Likewise, you should not sacrifice your financial goals for emotional wants. Wants are different than needs. An emotional need is based on an enduring underlying principle. An emotional want is typically impulsive and fleeting. People who have had trouble saving or sticking to a budget might be putting their emotional wants ahead of their financial goals. That will need to be addressed if you are serious about making and sticking to a financial plan.
A few common ways people use money to satisfy emotional wants include:
1. To change a mood. Have a fight with someone or a bad day at work and you just want some shopping therapy? Do you actually need those items? Would you still be buying them if you were paying cash for them instead of running up the credit card?
2. I don’t feel like dealing with it now. Putting off resolving a financial situation in order to avoid some unpleasantness can be costly.
3. Addictions. Problem drug use, alcoholism, and compulsive gambling can be very costly, to be sure, but there are also more subtle addictions. Online shopping and gadgetry hobbies can also eat up your money.
4. Being a hero. Helping out friends and family in times of crisis can be a good thing, but it can also go too far. Sacrificing your own financial goals for someone else is rarely helpful in the long run.
There are numerous other ways emotion can seep into our financial lives. Until the late 1960s finance models assumed investors behaved rationally - predictably always seeking maximum returns. Then two cognitive psychologists, Kahneman and Tversky, observed that sometimes investors behaved irrationally. People have different approaches to problem solving and cognitive biases (and emotion) can and do influence our financial decisions. Kahneman and Tversky called it behavioral finance.
Take my observation above about the pilots and their combat pay. I was part of numerous small group conversations after that meeting where the XO proposed sharing the wealth. Nearly everyone agreed that if the XO had made his proposal before any of the pilots had flown over the line that earned the extra pay it would have been more warmly received. His mistake had been waiting until after the fact to bring it up. In other words, having the money made it seem much more valuable to the people who had earned it. They would be forgoing the same amount of money no matter when the decision to share it was made, but the fact that some of the pilots already owned that money made the thought of parting with it seem like a greater sacrifice. Even those of us who didn't own any of that money understood why this was true.
The same phenomenon can be seen in many different ways. Ever have anyone express outrage that someone offered them $275,000 for their house when it is clearly worth $350,000? Is the house really worth $350,000 or does the act of owning the house inflate its value in the owner's mind?
Or look at the chart to the right. It shows a generic market cyle where the market goes up, then goes down, and then ends up right where it started. Plotted along the curve are the emotional phases investors go through during this cycle. While it's somewhat humorous because we recognize ourselves in this cycle, it is also tragic. Making investment decisions on that emotional roller coaster costs investors trillions of dollars.
Part of the value I provide as a financial planner is a more objective view of your money than you have. I get to know my clients and I want them to succeed, but I don't have the same level of emotional interest in their money as they do. As I like to say, when it comes to your money, I am the calm, rational one.
If you're interested in an objective opinion on how to best reach your financial goals, please contact me.
I keep up as best I can with the news, trends, and inside workings of the Financial Planning industry. I consider it part of my duties as a professional financial planner. I read a lot. Over time I have found some authors with whom I typically agree, and, of course, authors with whom I typically disagree. Bob Veres is a fellow with whom I find a lot of common ground. I particularly like one of his most recent articles that appeared in Financial Planning Magazine entitled The Winds of Change. (The online version is called Advisers Ignore These Trends at Their Peril.)
In this article Bob Veres highlights the trends in the financial advising industry that are forcing professionals to adapt and evolve. Those who cannot adapt and evolve will likely see their practices wither and decline. I sum up the trends he notes as follows:
The Rise of The Fiduciary Standard. Through a variety of means, the public is becoming educated on what a fiduciary standard of care means - and they want it. People want financial advice from someone who is putting the interests of the client ahead of their own personal interests.
Rational Fees for Service. Technology has made portfolio management highly affordable. This makes paying commissions on sales objectionable. Paying advisers a percentage for managing assets no longer makes much sense either. Hourly billing or a flat retainer fee for continuing service are much more reasonable fee structures in today's world.
Service to the Middle Market. When an adviser's compensation was directly tied to commissions and percentages they naturally pursued high net worth clients. The evolution of fees to retainers and hourly charges makes a client's net worth less important. Service can now be provided to people with incomes, not just people with assets to invest.
Growing Desire for a Collaborative Experience. Millennials grew up with the internet. They are accustomed to having instant access to near-limitless information and they don't mind doing some of their own research. Mom and Pop might have been OK with an adviser handing them their financial plan after a single meeting, but this generation is not. They want a knowledgeable guide, but they also want to participate in the preparation of their own plan.
Specialization. Stealing straight from Bob Veres - how happy would you be talking to heart specialist about your skin rash? Would you be happy to know he was willing to take you as a patient just because he knew you could pay, even though it meant he would be spending a lot of time on Google looking up your condition? People want a specialist. They want someone who has detailed knowledge coinciding with their personal financial situation.
I think many financial firms and professionals will have trouble evolving to these changing trends in client expectations. They have a business model that has worked for decades and they will find it hard to embrace a new model. Recent reporting indicates some advisers are getting out of the business for those very reasons.
Fortunately, I don't find myself in that position. I designed my business to be the financial planning firm I wanted to find 20+ years ago - and it incorporates all of those elements. I strongly embrace the fiduciary standard of care. I charge on a fee-only basis through retainer or hourly fees, and I keep those fees at a level that is affordable to the middle market. I put the word "Partners" in the name of the firm to highlight the collaborative nature of the financial planning process I employ.
And I specialize. My target clientele are military families/federal employees, with an additional niche carved out for people with special needs. I have many years of direct experience with these segments of society and I believe I have the most to offer people in similar situations as my own. While I can (and do) provide service to anyone whose trust I have been privileged to earn through my tax practice, most of my new financial planning clients will come from those communities. We speak the same language.
My children would be shocked to discover I was on the cutting edge of anything, but as a financial planner I think I qualify. If you'd like to have a new experience with a financial planner, give me a call.
I am happy to make this my first post on this blog. The problem(s) with the financial advice profession is a truly important topic, but it is difficult to explain in a way that keeps people's interest. That's where John Oliver comes in. He has taken a topic that is important, but rather boring to most people, and makes it interesting enough to sit through. I don't always agree with John Oliver, but I think he knocks this one out of the park. I want as many people to see this as possible. There is some profanity and a vulgar reference or two, so don't watch it when the kids are around!
Some items I want to highlight:
Around time 3:40 when he points out that you can call yourself by a variety of job titles such as 'financial adviser' or 'wealth manager' without having any credentials whatsoever. This is how people pushing the sale of high-commission financial products can get away with calling themselves 'adviser'.
Around time 4:10 where he points out that an adviser who works on commission may be trying to sell you a financial product because it will make money for the adviser, not for you.
Around time 5:50 where he explains that a fiduciary adviser puts the clients interests before his or her own personal interests, but most advisers are not fiduciary advisers.
Around time 8:56 when he points out that active portfolio management will more often than not produce inferior investment returns.
Around time 16:20 when he points out that "it doesn't have to be that complicated". (The 5 simple rules at the end are quite a good place to start!)
Pay attention around time 16:31 when he points out the new Department of Labor rule requiring all advisers handling retirement accounts to act as a fiduciary. I just want to add here that I act as a fiduciary for ALL accounts, not just retirement accounts, and I don't need a Department of Labor rule telling me how to do that.
This video really hits home for me. The things wrong with the financial advice industry that John Oliver points out are not new. I dicovered them 25 years ago when I was looking for an adviser. They are the reason I have spent the past 3 years getting educated, qualified, certified, and registered to open PIM Financial Partners. I've been told I can't build a successful practice providing fiduciary financial advice at a price the middle market can afford.
I respectfully disagree.