At first glance it may seem that the cold Texas just endured, earthquakes and investing have nothing in common. And on the surface they don’t. But take a bit deeper look and we gain important perspective that can help financial advisors enhance their value.
Texas is now recovering from a blast of cold weather that brought the state to its knees. As temperatures were near zero, pipes were bursting and the electric grid was strained. During those days of cold, up in Minnesota (where I live), we were experiencing 20-30 degrees below zero. And yet life went on without any disruptions. So what gives?
The answer is pretty straightforward. This was an anomaly for Texas, they normally don’t get this cold whereas significantly below zero temperatures in Minnesota (and many other places) is part of an average winter. This was such a big deal in Texas because they aren’t built and don’t have the infrastructure for such cold temperatures. If zero temperatures became the new winter in Texas, the infrastructure would adapt and adjust, making future cold spells just a normal part of life.
Now let us consider earthquakes. Many places around the world sit on or near fault lines and regularly experience earthquakes. These locations have specific building codes to ensure a building can withstand powerful earthquakes. A magnitude 7 earthquake in these locations does relatively little damage other than broken dishes (assuming structures are not sitting on landfill and are up to code). However that same earthquake in other places of the country would be absolutely devastating. It all comes down to infrastructure.
The stimulus is the same (cold temperature, earthquake) yet the impact on our well-being is largely dependent upon how prepared we are for such an occurrence. The more often it occurs, the more likely it will be accounted for in our infrastructure. And when we are prepared, even when undesirable events occur, we can get through it just fine.
The Investor’s Infrastructure
This brings us to the investor’s infrastructure. I’m talking about the brain. Science and empirical evidence demonstrate that we are hardwired to be bad investors. We make mental shortcuts and are influenced by emotions. These biases wreak havoc on our financial decision-making abilities. This is our natural state of being; it is our natural infrastructure.
However, we learn from science that the brain also exhibits plasticity. This means it can change and re-wire itself. In other words, we can make upgrades to our infrastructure to adapt and adopt for the conditions in which we currently live.
The Investor’s Environment
In order to find out what what upgrades need to be made, we need to identify the environment in which we live and how well our current infrastructure is suited for it.
Investors live in an environment filled with uncertainty. We have a constant barrage of noise (24/7) that comes from various media outlets. Our society is focused on everything happening fast and instant gratification. The environment in which investors live is constantly stimulating biases within our natural infrastructure.
We are tempted to chase returns (recency bias), we listen to “experts” (illusion of certainty), we live in constant fear of the next downturn (loss aversion, myopia) and allow headlines to influence us more than a personalized and thoughtful plan (availability bias). There are several more biases, but that should make it clear that our investing infrastructure needs an upgrade.
I really don’t like the term “behavioral coaching”. It is ambiguous and I have met several advisors that claim to do it, yet do it so poorly and ineffectively. Effective behavioral coaching is the single greatest value you can add to your practice. Don’t believe me? Check out this report by Vanguard.
What does effective behavioral coaching look like? Well, that may be somewhat subjective to an advisor’s style. I am very particular and have had great success crafting messages for advisors to use. Some tips on effective content: make sure you are sharing valuable perceptions, realistic expectations and anticipating how investors are feeling or are likely to feel. Address those head on in a proactive and consistent manner.
A Little Diatribe 🙂
It is a shame that many advisors don’t do this kind of messaging. Instead, they sign up with some marketing library (or get content through their website provider) and share content that has zero effectiveness in improving the investor’s decision making process. Advisors tell me, “yeah, but the marketing library will post it to social media and send directly to clients without me having to do anything.” Advisors don’t even read the content themselves. At that point the advisor is part of the “noise” and runs the risk of turning clients off. Every message you send out should be centered on upgrading your client’s mental infrastructure, and something you personally find of value.
Every advisor says that they care about clients, but many jump at anything that will “scale” their business, and prefer things that are free and/or take no effort. There are great ways to scale in our business and many great free tools, but please don’t skimp on the single most important value you offer investors.
If you’d like to check out some of my past content I created for advisors and/or would like to learn more about The Behavioral Finance Network, Email Me.