My biggest initial mistake as a financial planner: underestimating the power of emotions. My office is located near top universities such as Harvard, MIT and Boston University. I assumed my well-educated clients, many with strong quantitative backgrounds, were simply looking to me for additional analytical insights.
Instead, my clients proved to be as human as everybody else. One top academic statistician, who claimed to be frugal and cautious, shared with me an annuity policy he purchased from a close friend at his church. Because my client had a trusting relationship with this person, he didn’t bother going through the insurance prospectus.
If he had read the annuity’s fine print, my client would have noticed it included a large upfront commission. When I presented this information when we next met, it was unclear who he was more annoyed at, his salesman friend for not being transparent about the commission—or me for pointing it out.
Over time, I learned that, what may appear to be clearcut from a financial planning perspective, can be more nuanced once you factor in emotions. I had a brilliant academic insist on depleting his retirement account to purchase land, thereby protecting the panoramic view from his patio, which he loved. My risk-reward analysis favored keeping his retirement account in place. This academic praised my retirement analysis and told me that, as his advisor, he did indeed expect to hear about the downside of spending his retirement funds. Yet he still went ahead and purchased the land. A decade later, my client remains content with his choice.
The psychologist and economist Daniel Kahneman won a Nobel prize for demonstrating how our cognitive judgments are influenced by innate biases. For example, he showed that we feel our economic losses much more deeply than our gains. In his book Thinking, Fast and Slow, he demonstrates that important decisions require more deliberate thinking.
Along those lines, I’ve learned to appreciate that clients may be more prone to ill-advised thinking after major market losses—and I take that into account when determining their asset allocation. For instance, if clients are inclined to worry about money but they tell me that they’re comfortable investing 50% to 60% of their portfolio in stocks, I’ll recommend the 50% allocation. Later, when they want to sell part of their stock position during a market decline, I remind them what they had earlier suggested—and how we positioned their portfolio at the conservative end of what they wanted.
My lesson from more than a decade as a financial planner: It’s my job to slow things down and understand a client’s situation holistically. Planning should be guided by the numbers. But good advising also requires that I truly understand the client’s mindset when presenting the “right course of action.”