Are your clients as wealthy as they are rich?

What is the difference between being wealthy and rich? It’s one of the biggest questions our industry has wrestled with for many years. That’s why I was quite excited to read “The Thin Green Line,” Paul Sullivan’s new book. Paul writes the “Wealth Matters” column at The New York Times, and I enjoy his perspective that usually features individuals sharing a personal story that then connects with how our industry is solving their challenge. Several years ago he interviewed my mother-in-law, Jeannie, as a background story for how our firm came to apply behavioral tools to helping people with their financial life. (Even though I was nervous at the time, I still get major kudos from Jeannie, mostly because they took a really good photo of her.)
I was quite intrigued to see how a reporter (albeit one well versed in our industry) would write a self-help book about investing and wealth. I am not going to review the book, but I did want to discuss the underlying concept that runs throughout the book, and how it applies to our clients and to each of us as their advisers.

Wealthy vs. rich

“The Thin Green Line” explores the difference between those who live above the line, and feel good about their financial life (regardless of the amount they have), and what differentiates them from those who do not. In other words, what defines those people who are wealthy, regardless of how rich they are? The book is full of examples and personal anecdotes, but I was left with three big questions about our jobs as advisers:
1. Is our job to maximize net worth, or maximize people’s lives? Most of our industry assumes that we are in the business of growing clients’ savings as much as possible in a risk-conscious way. Interestingly, Mr. Sullivan argues that making conscious trade-offs and knowing what you can and can’t afford is one of the most important elements to being satisfied, regardless of how much money you have. In fact, there is an underlying assertion that being overly focused on building the biggest nest egg you can might take away from living the best life you can. Our own research with individuals and families validates this opinion.
(Related read: Goodbye wealth management, hello financial life management)
2. Is helping our clients spend wisely as important as helping them invest wisely? The underlying message of the book really is that people above the line work diligently to live within their means and are well prepared for life’s unpleasant surprises, without sacrificing their current lifestyle. They also have clarity about what they are working for and what their money’s purpose is. I don’t know any competent adviser who doesn’t help clients protect against bad outcomes, but how many also think that it might be just as important to give certain people permission to spend more, too? We have all seen the situation where a couple scrimps and saves their entire lives. They sacrifice their own needs and then they leave a wonderful nest egg to their heirs, who are more than happy to buy all the things their parents denied themselves (nicer homes, big vacations, et al.) It’s not our job to tell people what to do with their money, but shouldn’t it be our responsibility to help people have more clarity about what they are really saving money for, beyond security?
3. Do we have too much faith in clients being rational actors? Much of the book explores the question of why people often act in an irrational way. In other words, some folks do bad things knowing full well that there will be bad consequences. I love this subject because the ultimate dilemma for all of us is trying to help people make good financial life decisions. It’s hard work for our clients to be financially disciplined all the time. Our job is ultimately to help them in making conscious choices. I like to think of a good decision as having three key elements:
-Truth. An unfiltered, unbiased and complete set of accurate facts.
-Understanding. Objective analysis with a caring and aligned perspective.
-Discipline. Clear, deliberate and well-executed action steps.
It’s helpful to remember that while many of our clients might be rational actors when they are in our offices talking about financial outcomes, they usually revert back to their normal lives afterward. Life has all kinds of influencing factors, many of them emotional and psychological, that cause people to make choices that hurt their financial future.
We ultimately earn our fees because we have improved people’s lives by helping them make smarter choices than they would have made without us – if that’s true, then we as advisers are invaluable. If it’s not true, then people will simply leave you or not recommend you to their friends. Mr. Sullivan came to the realization that once the complexity of his life grew, and the cost of being wrong became too high, he benefited from working with a professional to help shape his thinking and give guidance on building a secure and “wealthy” future.
So here’s one last important question you might ask yourself, and it could be the difference between thriving and failing in a world where investments are being commoditized: Are your clients as wealthy as they are rich?
Joe Duran is chief executive of United Capital. Follow him @DuranMoney.