What is Ridiculous Behavior Anyway?

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From time to time I write about personal wealth and investing. I was a financial advisor for 15+ years after all, so it’s a part of who I am. Also, it’s quite fascinating to me how the investment industry has evolved over the years and continues to evolve in the age of social media.

It bothers me greatly when I see articles like this from MarketRiders that attempt to convince consumers that they are stupid for working with a professional financial advisor. These guys have created an innovative distribution channel for selling their financial services and I applaud them for such, but I can’t stand it when investment firms attempt to convince investors to use their products based on the premise that “you’re stupid if you do otherwise.”

Consumers are smart. We don’t give them enough credit.

I ask the following question: Which cost is greater – The cost of paying a financial advisor or the cost of a bad decision?

The best financial advisors realize that their job is to save the client from himself. You see, there is something called the behavior gap that explains the difference between the returns achieved by the S&P 500 over time and the returns not achieved by the average investor.

Why does the average investor consistently underperform the S&P?

Here is MarketRider’s reasoning for the difference in returns:

Possibly the cause is rooted in the astute advertisements run during the Masters, British Open, U.S. Open, and beyond that get your investment account open and your mind closed. Critical thinking skills can be whisked away by multi-million dollar marketing campaigns targeted to cast their spell. Once an investor buys the commercial rhetoric, a hypnotic trust can hijack critical thought. The hypnotizer can get the otherwise astute subject to perform the most ridiculous behavior, such as paying someone to take his money.

Is allowing someone to manage our wealth and paying them to keep us on the right track ridiculous behavior? Or is it ridiculous behavior not to work with an advisor to help guide and support us toward our financial objectives? What about my personal trainer who helps me stay in top physical condition? What about my business advisor who helps me make good decisions about my company?

A Story of Ridiculous (and costly) Behavior

One of my wealthiest and most successful clients in past years once had an opportunity to lock in a significant gain on a concentrated position. It kept me up at night thinking about this inherent risk he was taking on as he had recently taken an early retirement package from a large corporation (back when these packages were still offered).

He refused to sell AND he refused to protect his position. Why? Because he did not want to pay the associated fees, which by the way were very reasonable, and probably would not have even made a car payment for me at the time. Several months later, this concentrated stock he owned plummeted and lost 90% of it’s value. The entire way down he refused to sell because he thought “well, it will come back…I know this company and they’ve been good to me”. It never came back.

What might have cost the client several hundred dollars to protect a six figure position ended up costing him the six figure position…a good chunk of his retirement assets.

What was the culprit here? HUMAN EMOTION. THE BEHAVIOR GAP.

Want to learn more about how to become a better investor? (and it’s got nothing to do with fees) Go and spend some time on my friend Carl Richard’s site “The Behavior Gap” and stop reading the garbage that would have you believe you’re ignorant for investing in help.

The professional financial advisor that you do invest in for help should be someone you trust, should communicate with you frequently, should provide education and insight, and should charge fees that are fair and reasonable based upon the services they provide for you. If you pay an advisor 1% of your assets and it saves you more than 1% due to the prevention of ridiculous behavior, you’re better off!

Even as an experienced and credentialed financial advisor, I still can’t successfully manage my own money. I make too many emotional mistakes. We all do. None of us are immune from the emotions that are tied to our personal goals and dreams for our families and our lives.

The job of a financial advisor is to save you from yourself. His or her job is to help remove that emotion from your decision-making process. The best financial advisors are much more than money managers, they are life counselors and coaches.

So I ask you? Which cost is greater? Investment advisor fees or your bad investment decisions?

p.s. Ironically, the MarketRiders Blog does not allow for comments…

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About Stephanie Sammons

I'm Stephanie Sammons. I teach professionals, business owners, and entrepreneurs how to build online influence for business success.

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  • Charlotte74

    I’d have to disagree about consumers being smart when it comes to financial decision making. Most people have no idea about finance, saving, mortgages, pensions etc and badly manage their money.

  • http://www.wiredadvisorblog.com/ stephsammons

    Exactly! What I’m saying is that consumers are being told they are stupid for NOT utilizing or paying a professional financial advisor. I’m arguing in this article that the majority of consumers need the coaching and guidance.

  • NealAdvisors

    Good points. The challenge, of course, is finding an FA who is competent, has a strong analytical mind and is not just pushing products to generate fees. Also, in my experience, advisors who are successful take time to ask the right questions of their clients in order to ascertain their real needs, and also seek to educate them so that they feel they are part of their wealth management. That attitude builds trust and ultimately leads to more bussines for the advisor.

    • http://www.wiredadvisorblog.com/ stephsammons

      @NealAdvisors Thanks for the comment. I think there are a lot of those advisors out there as you describe. Sure there are some bad apples, but plenty of good ones. So in a sense it has to go beyond finding a competent FA who doesn’t push product. What does that entail? I think you have to find a way to connect with the people in your target markets emotionally through sharing your thought leadership and passion about who you help and why, and reach them in a number of ways. (blogging, social media, email, phone, events, etc) Thoughts?

      • NealAdvisors

        @stephsammons@NealAdvisors Absolutely. In my experience, the really competent FAs tend to have a more subtle approach and can benefit from consultants in marketing themselves to their target audience, while the more gregarious “sales-y” types are usually more comfortable with frontal marketing. Of course, this is not true across the board – depends on the individual. I think the marketing channels one uses should be based on their capacity and where their audience is most likely to listen. Certainly, social media offer competent FAs tremendous opportunity to develop a though leadership and a real “social” presence, which is key to growing their practice.

  • http://48hourmasters.com/ 48 Hours Master

    The idea here is that rebalancing should never, or almost never, involve selling something you’ve already bought: instead, you can just put your new money into the asset classes where you’re currently underweight.

    • http://www.wiredadvisorblog.com/ stephsammons

      @48 Hours Master I agree with that, but there are times to have no exposure to certain asset classes when they are either overbought or oversold do you think? One of the problems I always recall with managing client assets is they tend to focus on what’s not working, so part of it is effectively managing the client and teaching them that something will always be going down (while others will go up)!

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