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How to Give Financial Advice

By Morgan Housel - Dec 8, 2015 at 3:50PM

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A lesson from doctors.

Thousands of investors go on Twitter and CNBC to debate each other, showing why they're right and competitors are wrong. Everyone is after the same thing: The Right Answer, the best advice to give clients.

Here's the truth: It doesn't exist. To see why, consider how the relationship between doctors and patients changed in the last 30 years.

For decades, the relationship between doctor and patient was strict: Doctors made decisions, patients did what they were told. There wasn't a lot of negotiation between the two. Author and surgeon Atul Gawande wrote in his book Complications:

Doctors routinely withheld information — sometimes crucial information, such as what drugs they were on, what treatments were being given, and what their diagnosis was. Patients were even forbidden to look at their own medical records: it wasn't their property, doctors said. They were regarded as children: too fragile and simple-minded to handle the truth, let alone make decisions.

This started to change in 1984 with the book The Silent World of Doctor and Patient. In it, Yale ethicist Jay Katz argued that medical decisions were inherently personal, so patients should be just as involved in making treatment decisions as doctors.

Its big insight was that there is no Right Answer in medicine. The textbook-best medical decision might be the wrong decision once personal emotions and goals are factored in.

Take two people with the same cancer. One may want to throw the kitchen sink at the illness, the other may decide to let nature take over. Both are the right decisions for them. This was foreign to medical researchers, who assumed all patients wanted whatever treatment had the best chance of success. Katz's book profoundly changed how medical schools taught the doctor-patient relationship.

The new relationship is a partnership. Doctors lay out a diagnosis, treatment options, risks, etc. But then the most important part of the conversation occurs when the patient is asked: "What do you want to do?" The decision is yours, as it should be.

Investing needs a similar moment of clarity.

Financial advisors, especially money managers, used to be gurus. They graced the cover of magazines. They made decisions; investors did what they were told.

But personal finance is deeply personal. A financial advisor can lay out recommendations and allocations, and discuss risks and rewards. But then should come the same question a doctor might ask: "What do you want to do?" The decision needs to be yours.  

The problem is: Financial advice isn't always given way. 

Steve Jobs was diagnosed with cancer and refused a surgery doctors felt had a high chance of success. "I didn't want my body to be opened...I didn't want to be violated in that way," he said in his biography by Walter Isaacson. Jobs tried changing his diet instead. People respect that. It was his decision. But those same people will argue you into the ground if you try to pick stocks, or have a different asset allocation than their model says you should.

That's crazy.

Everyone giving investing advice should realize that money is emotional and people are different, just like medicine.

I have a quarter of my assets in cash, and I'm fairly young. Most of you will look at this and shake your heads. By the textbook, it's a terrible allocation. But it works for me. It helps me sleep at night, and I have an idea of what I'll do with it. It's the right decision for me, even if it's crazy for you.

My parents are retired and have virtually all of their money in stocks. Few financial advisors would recommend this. But once my parents talk it through, you see that it works for them. They have a plan and understand the risks. It's the right decision for them.

Almost everyone has a similar quirk. You manage your money in a way that fits your personality, which can't be captured with a one-sized-fits-all formula. Two rational people with the same finances may come to totally different conclusions about what's right for them, just as two people with the same cancer can pick radically different treatments. The more I study personal finance the more I realize that coming up with a solution that lets you sleep at night, rather than one that's academically superior, is how you help people.

My friend Patrick O'Shaughnessy says he'd pay good money to see every financial commentator's personal portfolio. I agree; you'd be shocked at what you saw. Why? Partly because you'd see people hyping products they don't buy themselves. But you'd also see that everyone has a quirk, an allocation they're embarrassed to show you, the equivalent of Steve Jobs trying to cure cancer with vegetables. Don't judge them. You just have to realize: It might work for them, which is all that matters.

Here's how Carl Richards sums it up on the great blog Behavior Gap:

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Contact Morgan Housel at The Motley Fool has a disclosure policy.

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