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.
In the case of estate planning, the two conflicting thoughts are first, the notion that undertaking such planning is not only important to the individual but necessary for the protection of one's family members. The second thought is that they will live long, happy, and fruitful lives, so there is no need to worry and certainly no need to rush into the estate planning process.
The result is a conflicted feeling about the importance of estate planning in the first place. Admitting that life is short and you must plan for the worst in order to protect your family will lead to the realization that life will end soon. This is in conflict to the often-reported thought, "it won't happen to me and my family." Thoughts like these are examples of the human criticizing the need for estate planning in the same way the fox criticized the grapes, thus diminishing the importance of estate planning and confirming their belief that it is not worth the worry.
Those who refuse to acknowledge their own mortality may have a deep emotional conflict that cannot be remedied by a financial advisor. They may have unexpectedly lost a loved one or been near death themselves and survived. An advisor would do well to learn about a client's family history for the purpose of planning for life expectancy in retirement, risk management, and other applications. We believe it to be even more important to the planning process as a whole to help advisors understand the narrative that forms their clients' feelings and opinions around emotionally charged financial decisions like planning for their own death. Getting to know the story behind the actions should help advisors use that story to build better decision-making processes, foster self determination, and make positive change in the financial lives of clients and their families.
We will continue our applied behavioral finance series next month with some details about why we believe applications of behavioral finance are so important in our current economic environment--including neuroscientific evidence supporting the importance of self determination in financial decision-making and a fiduciary standard of care for financial advisors before continuing with additional practice observations.