With a few key observations and calculated interventions, advisers should be able to remove a client's barriers to creating, adjusting, and updating an estate plan.
We see applications for behavioral finance at its most simple in estate planning. Classic stories abound involving the wealthy patriarch determined to control the lives of his decedents from beyond the grave. The trophy wife trying to strike gold when her spouse, 30 years her senior, kicks the bucket. Children fighting over parents intentions left unsaid. Step parents breaking wills and raiding the wealth of their short-term spouses at the protest of the rightful heirs. Trust fund kids left millions without restriction wasting their potential and letting the guarantee of financial security deter them from working to make their own money. We could write an entire article on each of these and many other examples from our practice and will do so, but not today.
Instead we want to concentrate on resolving the aversion to planning in general.
A sudden change in health status never fails to motivate Americans to plan for the worst. In the past six months, we've seen diagnoses of prostate cancer, aortic aneurysm, multiple sclerosis, heart attack, transient ischemic attack (TIA or mini-stroke), and a few others work as the catalyst for an individual or family to get their estate planning buttoned up, in some cases for the first time. Why is it so hard to convince our clients to do so before the crisis? Could it be that the average person doesn't understand the need for an estate plan or the process necessary to create one? Or could it be that Americans hate the idea of undertaking such a process because they are avoiding the confirmation of their own mortality?
We believe it is a little bit of both, and with a few key observations and calculated interventions, advisers should be able to remove a client's barriers to creating, adjusting, and updating an estate plan.
Aversion to ambiguity can paralyze clients in the face of difficult and fear-provoking decision-making processes. Believe it or not, there are clients in the high net worth market who don't understand the process required to create a viable estate plan. They don't know how to get started, how long it will take, or how much it will cost. There are even more in middle-class America. Many middle-class Americans believe estate planning is necessary only if you are wealthy, and they probably don't consider themselves to be wealthy when they own a home and a million dollar 401(k).
The battleground to be conquered here is a simple one. Removing the ambiguity from the decision-making process will remove barriers to embarking on the process in the first place. This is a simple cognitive barrier that leads many Americans to move through life without the plans their family needs to transition safely after their loss. It can be remedied with education and advocacy.
A classic example of another kind of cognitive barrier was illustrated in an Aesop fable that gave rise to the term "sour grapes." The story spoke of a fox that came across some high-hanging grapes and fancied himself a snack. He tried mightily to reach the grapes and eat them but could not. Instead he convinced himself they would probably be sour grapes anyway, so the endeavor was not worth undertaking. The fox desired the grapes, found them unattainable, so he not only gave up but also reduced their importance by criticizing them. This is also an example of cognitive dissonance.
Cognitive dissonance is a psychological phenomenon explaining the feeling of uncomfortable tension that comes from holding two conflicting thoughts in the mind at the same time. In the case of the fox, his two thoughts were first that the grapes would be a wonderful snack but second they were unattainable.