Your brain is not properly wired to invest. By "your brain," of course, I mean yours, mine, and pretty much everyone else's. And Carl Richards has spent years shining a light on this through writing, art, and some smart financial advising.
Richards is a Utah-based financial advisor, as well as a columnist for The New York Times and the author of the recent book The Behavior Gap. In addition, his simple, finance-based art distills some of the key concepts that humans struggle with when trying to manage their money. In other words, if you want to get the lowdown on keeping your head straight and making good financial decisions, Richards is a great guy to talk to. And that's exactly why I called him up for a conversation.
Some of what Richards told me was included in The Motley Fool's recent special report on financial advisors. But he had plenty of other great advice for investors, describing himself as the finance world's version of The Lorax who's speaking for "the secret society of financial planners."
How can investors benefit from using financial advisors?
"The underlying premise," Richards began, "is that good investment decisions can only be made within the context of a good financial plan." While it may be more fun to talk about the specific investment vehicles -- individual stocks versus the S&P 500
He illustrated the point by telling me a story about a doctor friend who was struggling with a patient. The patient would constantly come into the office and want to debate the doctor about which cholesterol drug he should be taking. Meanwhile, the patient was seriously overweight and a smoker. The patient was completely missing the bigger picture.
In addition to helping clients plot out a financial plan that's based around their goals, Richards says that a good advisor "is a behavior modifier," which is something that "most of us need." This "objective third party helps you avoid doing stupid things … [like] buying at the wrong time and making big behavioral mistakes driven by greed and fear."
What's the best pay scheme for financial advisors?
Richards made it clear that there's no simple answer here. "Any time there's an exchange of money for services," he said, "there's a conflict."
While commission-based advising has some definite drawbacks, Richards noted that it's far from impossible to find good help from brokers and advisors that work on commission. "There are guys at [Bank of America's
Meanwhile, Richards notes that the fee-only model that has clients paying based on a set hourly rate -- a system that some experts laud as the best of advisor-pay models -- has its drawbacks as well. "The dilemma that I have with hourly is how long it takes" -- namely, clients could potentially get frustrated that hourly advisors are working slowly and racking up too many billable hours. "Also," he added, clients "end up avoiding calling because it'll cost [them] money."
In his view, the assets-under-management model -- in which customers pay a percentage fee based on the amount of assets the advisor is managing for them -- is "the best model I've seen." Because this model sets up a continuous, ongoing relationship, it provides the best opportunity for the "behavior modification" that Richards thinks is so important in an advisory relationship.
Or, in other words, it creates a trust-based relationship that allows the advisor to step in during tough times and say, "Hey man, it's tough, but you can stick in there."
How can the financial advice industry change for the better?
Richards got particularly fired up about this question and offered four key points.
- "Take it as a profession," he said, with a bit of exasperation creeping into his voice. Industry practitioners need to "get serious about it and understand that we're dealing with people's dreams and goals ... It's a sacred trust and you need to know what the hell you're doing. Half the industry is full of guys that'd be selling shoes if they weren't doing this."
- "Don't pretend to be an advisor when you're really a salesperson. So many [brokers and financial advisors] are pretending that [they're] objective advisors. You'd never walk into a Toyota dealership and expect them to tell you to buy a Honda even if that's what's best for your family."
- "Treat people like real people."
- "Simplify this! Stop trying to rely on complexity as a selling tool. People want this simpler ... people will pay for simplicity."
Should investors use a financial advisor?
Richards believes that "people want help, they just don't believe it exists." And, in his view at least, they're right to want it. "Unless we see [Warren] Buffett in the mirror, we need somebody to help us avoid making those genetic behavioral mistakes."
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