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Do Your Clients Have Money Madness?

A consumer finance book could be an asset for advisors.

David J. Drucker, 02/26/2009

I've known Spencer Sherman for a long time. Yet, when I heard he'd written a consumer personal finance book, I had to wonder: "Does the world really need another one of these? Haven't countless advisors and less-credentialed writers done these to death?"

I guess not, because Sherman offers something rarely found in other consumer finance tomes: common sense. "I focus on seven simple rules throughout book, such as, 'don't put all your eggs in one basket.' It's a rule everyone knows, but few follow."

Sherman, one owner and CEO of Abacus Wealth Partners, LLC, says his book, The Cure for Money Madness, began from his own painful experiences around money growing up. "I needed to find a cure for all the crazy, unproductive money behavior I have displayed throughout my life," says Sherman, and he says the behavior included crazy investment decisions earlier in life and, more recently, a difficulty communicating about money with his wife and sharing information about the family's assets, and pain around certain long-held money beliefs.

"When I was a kid, I once asked my father how much money he made and he gave me a look of terror and shame that really affected me. The lesson I learned from that was 'self worth equals net worth,'" says Sherman. "I was thinking this morning about how diseases like cholera are caused by polluted water. In much the same way, money madness is caused by polluted water in the form of beliefs we acquire early on and carry with us into our adult life that affect how we save, spend, invest, and think and talk about money. Now the disease is global and it spreads. I knew people who worked at Bear Stearns--the smartest people in the world--who failed not for lack of knowledge or intelligence, but for the disease that caused them to put all their eggs in one (mortgage) basket."

He says that the pollution that caused this irrational behavior was the brokers' fear of not being in first place.

"I've seen this with clients, too, of course. In 1990, a client asked me to double his money--which I did. He had said he'd be [financially] free if I could do that. Yet, in 1995 with his money still doubled, he said he needed twice as much."

All of these things led Sherman to realize that there was something else going on around money that's bigger than what a financial advisor can solve. "It's about unhooking the client from early childhood conditioning around money," he says.

Another example: "I come at investing asking, 'Why is it that there's a path to amazing success in investing and yet even though it's publicly known, relatively few people follow it? In other words, we know that if you just buy index funds, you'll do better than 70%-90% of all professional money managers, so why is it we don't use this strategy? Why is so much money thrown at professional money managers? People aren't stupid, but emotions drive them to make these poor decisions."

The client has to accept that his investment life will be really boring if he follows an index funds approach, says Sherman. "People are looking for investment excitement with investments like startup solar energy, Google, or other securities learned about as "hot tips." These become more compelling and exciting. "Talking about asset classes at a cocktail party doesn't get a lot of attention, so most of my investment chapter is understanding what's really driving us with our investment life, and asking, 'Why don't we follow proven strategies?' There's no other place in life where you can do nothing, take the hammock approach, and land in the top 20% of all [competitors]."

How about 2008? "I checked and active fund managers trailed their indices by an average of 1.5% for domestic stocks and 3% for international stocks. These numbers may not be that compelling, but while our firm's portfolios didn't make money in 2008, they did outperform active money managers."

Much of what Sherman has discussed with me up until this point sounds like a blend of the work George Kinder and Olivia Mellan have done.

"George's work is amazing and provides a model [The Seven Stages of Money Maturity] to follow. Olivia Mellan talks about personality types, which play a role in the process, but I think rather than having a client identify himself as a type, I want to help him get free of and not identify with his past," he says.

So there are crossover elements in Sherman's, Kinder's and Mellan's work, says Sherman. "We're all getting at some aspects of this thing I call 'Money Madness.'" And that's OK, he says, because Sherman says he believes there should be hundreds of books on this topic, " ... and fewer books on how to double your money in the stock market, all of which say the same thing."PAGEBREAK

A look at some of the chapters in Sherman's book can give a glimpse of why this book's different from others. "I have a whole chapter in the book on renting vs. buying where I try to shatter money myths like, 'Renting is throwing money down the drain' ... a belief most people hold true--at least up until three years ago. When I look at the costs of buying, even if the home can be assumed to appreciate 4%-5% a year, most of us are better off renting. We don't take into account all the costs and benefits of both sides of the choice, and there are subjective factors, as well, that we seldom consider." For example, Sherman says, if a person rents, he can be more mobile in an economy that may demand mobility as jobs become scarce.

Sherman includes a chapter on couples he calls, "Get Naked with Your Finances."

"It's about breaking down some of the cultural inhibitions that keep us from talking about our money," he says.

Another of his seven simple messages is spend less than you earn.

"I stress simplicity a lot in the book. When I talk to advisors, I hear that any time they executed some kind of complex strategy for a client, seven times out of 10, those recommendations ended up losing money. If they had instead followed a simple approach, they would have come out way ahead. So, in terms of spending money, I say keep it simple."

Interestingly, Sherman says, our grandparents couldn't overspend. "It's not that they were smarter; they just didn't have credit cards and it wasn't as easy to borrow money. The average person didn't need Quicken. The old budgeting systems, like keeping cash for specific purposes in separate envelopes, worked the best." Sherman recommends to readers that they take a "credit card moratorium" once a year for one month--both the client and spouse. Instead, he has them use cash or checks, keeping a credit card around only for emergencies.

"This does a couple of things," Sherman says. "First, it's hard to overspend. Second, credit cards distort our buying patterns so, when my wife and I do this little experiment, we find our buying values change. We spend money differently with our credit cards than if we have to take five $20s out of our wallets to pay the bill at a restaurant. Dealing with cash changes the whole nature of that experience. Paying for a cashmere sweater with cash, for example, changes my mind about the sweater, whereas the plastic removes us from the transaction."PAGEBREAK

The Cure for Money Madness also contains a whole section on "sufficiency."

"I take on the financial advisor's notion of 'What's your number,' in the sense of what amount of money does the client need to be free. It's a myth that there's a number you can reach that equates with freedom. This notion has been fed to us by the press and financial institutions, that if we save $1 million or $3 million, then we'll have enough." But Sherman says that he's not witnessing that. When and if most people reach their monetary goal, they still don't feel they have enough.

"If you're focused on the future thinking there's some amount of money that will be sufficient, then you're also saying you're not OK today. It's the dependence on a future event and having some specific amount of money in the future that strips us of our value today and results in an eternal feeling of shortcoming or net worth deficiency. It leaves out consideration of future lifetime earnings, too. How can you say that two people with $100,000 in the bank have same net worth if their abilities to work in the future are different? The one who's unemployed or unskilled has a lower net worth, in present value terms, that the one who has a job and has professional skills."

Another intangible that seldom enters the equation, Sherman says, is health and its value. "I always ask people in workshops: 'Would you rather be a billionaire in poor health or homeless and in good health. They all want good health. The whole point is not to try and nail people down to a number. When you look at net worth in [a more enlightened] way, you no longer have to believe self worth is equal to net worth."

Sherman's Web site includes an offer to receive his "Financial Vitamin" newsletter. "This came out of a workshop I was leading in which I suggested to the attendees that they come up with some affirmation, some new directions for themselves in some specific financial area of their lives. For example, "I will give up credit cards, starting spending cash and I'll spend less than I earn for the next three months." As I was giving to people this homework assignment, the idea of 'financial vitamin' flashed in my mind. I said, 'Read that affirmation to yourself every day and consider your once-a-day financial vitamin as an antidote to the disease of money madness."

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