Behavioral finance expert prods advisers to put risks in perspective for clients; get personal
Market gyrations may spook investors, but the true worries in life come from the real world, not stocks, according to behavioral finance expert Meir Statman. And that's one reason financial advisers should break down the barrier and, get to know their clients on a much more human.
“You don't need to be a psychologist, you need to be a good friend,” said Mr. Statman in his keynote presentation Monday morning at the Investment Management Consultants Association annual conference in Seattle.
“Provide advice as a friend, and as a good person,” he said. “Anyone can do an asset allocation plan, what is the difference is the kind of emotional contact you establish with your clients, and one way to do that is to reveal some of your own vulnerabilities.”
Mr. Statman, a professor of finance at Santa Clara University, stressed the emotional side of investing and providing advice by providing extreme examples of how money is managed and spent.
“Why would anyone pay $100,000 for a watch when a $10 watch is just a good at telling time?” he proposed. “It's the same reason people invest in hedge funds just to be part of an exclusive club, or spend millions of dollars on a painting.”
For financial advisers to move beyond just building financial plans for clients, Mr. Statman said “you need to be your client's physician to help promote their financial health and well-being.”
He cited a recent investor survey showing that 94% of respondents said they were saving and investing for financial security. But the second most popular response was that people want to be able to take care of and help their children. “It's not just about the money,” he said.
For context, he referred to the 2008 financial crisis when the stock market was falling.
“The great recession was a shock, and if I told you I wasn't scared I would be lying to you, but even though it was scary it wasn't the end of the world,” he said. “The real risks in life are not the stock market. If you want risk, get married. And if you want more risk have children.”
Of course, this doesn't mean the money isn't important and that sound financial advice and investment strategies should be pushed aside for a bigger emphasis on the touchy-feely stuff.
On the psychology of investing, Mr. Statman singled out Jim Cramer, the host of the ruckus television show Mad Money.
“Buying stocks based on Cramer's recommendations is stupid,” he said. “I like to describe myself as a man that trades like a woman; men are way overconfident when it comes to investing and sometimes that needs to be tamped down.”
Fear, on the other hand, “will prevent you from doing stupid things,” he said. “And diversification keeps us in the channel and assures that we will not have all of our money in the bottom-performing assets.”
Ultimately, he explained, it is about managing emotions and embracing the right perspective.
“Know yourself and your clients, and be their teacher,” he said. “What we all want is bond-like risk and equity-like returns, but you can't have that. This is a game that involves winners and losers, and you have to ask yourself who is on the winning side.”
