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Brian Portnoy: Balancing Returns With Simplicity, Financial Independence, and Peace of Mind

The author and financial-wellness advisor discusses ‘funded contentment,’ financial education, and the behavioral finance behind it all.

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Our guest on the podcast today is author Brian Portnoy. Brian has written two books on the field of behavioral finance, The Investor's Paradox and The Geometry of Wealth. He's also the editor of a forthcoming book of essays about how financial experts invest their own money called How I Invest My Money.

Brian is the founder of Shaping Wealth, a financial-wellness platform that works with individuals and organizations to make better money decisions. For more than two decades, Brian has worked in the hedge fund and mutual fund industries as portfolio manager and educator. He was also our colleague at Morningstar in the early 2000s. He's a CFA charterholder and earned his doctorate at the University of Chicago.

Links

Brian Portnoy’s bio

Brian Portnoy’s books

Shaping Wealth

How I Invest My Own Money,” by Joshua Brown, The Reformed Broker blog, July 16, 2019.

Robert Seawright blog

Dasarte Yarnway

Morgan Housel

Shirl Penney

Efficient frontier definition

Harry Markowitz

Fama-French three-factor model

Capital Allocators

Ted Seides

Howard Lindzon

Four ‘Money Scripts’: Four Ways to Feel the Power of Money,” by Ken Eisold, psychologytoday.com, May 15, 2011.

Blair duQuesnay

Nina O’Neal

Ashby Daniels

Financial Wellness

“Financial Wellness in a Time of Crisis,” speaker Brian Portnoy, Association for Coaching, April 20, 2020

Funded Contentment

Behavioral Finance

Daniel Kahneman

Amos Tversky

Prospect theory

The Two Friends Who Changed How We Think About How We Think,” by Cass R. Sunstein and Richard Thaler, newyorker.com, Dec. 7, 2016

Misbehaving: The Making of Behavioral Economics, Richard H. Thaler, June 14, 2016

Daniel Crosby

Alliance for Decision Education 

Annie Duke

Save More Tomorrow: Practical Behavioral Finance Solutions to Improve 401(k) Plans, by Shlomo Benartzi, April 12, 2012.

Save More Tomorrow, Shlomobenartzi.com

Governments Are Trying to Nudge Us Into Better Financial Behavior. Is it Working?” by Shlomo Benartzi, John Beshears, Katherine L. Milkman, Cass R. Sunstein, and Richard H. Thaler, Washington Post, Aug. 11, 2017.

Financial Literacy

Annamaria Lusardi: ‘Financial Education Works, ” Long View Podcast with Christine Benz and Jeffrey Ptak, morningstar.com, Feb. 19, 2020.

John Lynch: Rethinking Financial Education,” Long View Podcast with Christine Benz and Jeffrey Ptak, Morningstar.com, Dec. 11, 2019.

The University of Chicago Financial Education Initiative

Transcript

Jeff Ptak: Hi, and welcome to The Long View. I'm Jeff Ptak, global director of manager research for Morningstar Research Services.

Christine Benz: And I'm Christine Benz, director of personal finance for Morningstar.

Ptak: Our guest on the podcast today is author Brian Portnoy. Brian has written two books on the field of behavioral finance, The Investor's Paradox and The Geometry of Wealth. He's also the editor of a forthcoming book of essays about how financial experts invest their own money, called How I Invest My Money.

Brian is the founder of Shaping Wealth, a financial-wellness platform that works with individuals and organizations to make better money decisions. For more than two decades, Brian has worked in the hedge fund and mutual fund industries as portfolio manager and educator. He was also our colleague at Morningstar in the early 2000s. He's a CFA charterholder and earned his doctorate at the University of Chicago.

Brian, welcome to The Long View.

Brian Portnoy: Good to be here.

Ptak: You've co-edited a new book with Josh Brown of Ritholtz Wealth Management. These are essays from financial experts about how they invest their own money. You also contributed your own essay, as did Josh, as did Christine, as a matter of fact. So, what made you and Josh want to put together the book? What was the inspiration for it?

Portnoy: Josh published a blog maybe a year-and-a-half ago with the title like "How I Invest My Own Money." And what he pointed out that I thought was interesting was that for as many years as he has been in the business, no one has really asked him that question. And so, he decided to reveal how he invests and spends and borrows. And I just thought it was revealing. It was raw. Josh is a really insightful guy. And I reached out to him--we're friends--and I said, “You know, this is something that everybody in the industry should do. If you're an advisor or an educator or a portfolio manager, figuring out or being able to articulate your money story is probably not only a healthy experience, it's probably beneficial to your clients and your community.” So, we developed that idea. And Harriman House, which has become sort of the publishing arm of financial Twitter, loved the idea, and they gave us a book contract. So, we went and tapped in total 25 people including me, Josh, and Christine, to write personal essays, just four or five pages, nothing too elaborate, but blank piece of paper. How do you save, spend, invest, borrow? And what we got back was pretty impressive. I think I have high standards for books, and this one really exceeded my expectations.

Benz: As these essays started to roll in, were there any things that surprised you about what your fellow experts were doing with their money? Were there any recurrent themes and especially things that were surprising?

Portnoy: Yeah, and I can't wait for everybody to see the volume. I mean, these are 25 pretty different stories. I mean, I guess, everybody has ended up in financial services, whether it be managing portfolios or working with clients. But I'll give a couple examples. Like, Bob Seawright, who is a friend of all of ours and a wonderful man and very articulate, he spent his entire essay talking about a lake cottage that has been in his family for multiple generations. He didn't get into portfolio diversification or what funds he chose. It was just a story about the money they've invested over the years into something that's really meaningful. On a completely different note, Dasarte Yarnway, who is one of the young rising stars of the wealth management industry, talked about his family's emigration from Africa to the United States and how he thinks about community and how money fits into him being able to help others.

Lots of people in some way, shape, or form talked about their retirement accounts, whether or not they might still have a mortgage on their home, and stocks they might like, and things like that. But I think the real color and flavor of the book comes through these personal stories, and we've got 25 of them.

Ptak: You alluded before to the fact that it's a very diverse collection of stories reflecting different perspectives, but there's also some commonalities among the essays, like a few that come to mind is how often freedom and independence are cited as maybe some of the animating principles behind how it is some of your contributors invest. What else did you observe as you were assembling the collection?

Portnoy: Yeah, so it's an important observation. On the one hand, the quest for independence, the ability to afford the life that you want to live, that theme did course through a number of the chapters, but what was also interesting was that people describe that in very different ways. So, for example, Morgan Housel is a contributor to the book, and he had one perspective. Debbie Freeman, who's a prominent financial advisor based in Denver--her life story is very different than anybody else in the volume, and she talked about the options that money can provide. On the one hand, we had people talking about financial independence generally, but then how it was manifested was quite specific.

Another consistent theme was the use of money in people's lives to take care of others. I think just about everybody's chapter talked about family, talked about community, in some cases talked about charity or philanthropy. And Shirl Penney, who wrote a great chapter, founder of Dynasty Financial Partners--he grew up in a pretty bad financial situation and has achieved unbelievable success and is giving back. And so, he spends some time detailing what he has been able to do for others and a lot of people did that, and I found it pretty inspirational.

Benz: I was also interested to see that many of the experts acknowledge that some of the decisions they’d made did not necessarily deliver the highest return on investment. So, what lessons do you think people can take away from that about balancing return on investment with other considerations like peace of mind, like simplicity and expediency. How do you think people should approach their own finances with respect to balancing ROI and these other considerations?

Portnoy: As you asked the question, it occurs to me for the first time that out of the 25 essays not a single person mentioned whether or not they had beaten their benchmark, the S&P, or the Dow, or the MSCI World, or 60-40 portfolio. Those are in the background in terms of some allocation decisions. But maximizing returns, beating the market didn't really seem to take hold with any of these authors and financial experts.

So, to your question and Jeff's question about financial independence, people have a sense of the life they want to live, were born into very, very different circumstances one from another. And so, figuring out how you want to underwrite whatever that vision is, how you want to match or map up your assets and liabilities, those end up being very personal decisions. And I think one of the motivations of the book from Josh and me was that we've all studied--we all know the textbook answers. We know what the efficient portfolio is. We know Fama-French, and we've read Markowitz, and we get all that. But when even experts get into the weeds of just, “OK, I've got kids, I've got parents, I've got a community, I've got aspirations that I'm striving for.” It is quite hard to map the formal theory to those subjective goals. And from what I've seen, the subjective goals win out, win out every time. And one thing we really tried to do in the volume was have a wide diversity of voices. So, folks are younger, folks are older, just a fair amount of diversity across multiple dimensions, and I think that brings perspective that we often don't get in the financial industry, which tends not to be particularly diverse.

Ptak: What were some areas where the experts that contributed to the book tended to veer from conventional investing or financial-planning wisdom?

Portnoy: Yeah, I'd flag maybe a couple of issues. One is maybe concentration risk. I think what you saw in a number of chapters, I think if I recall correctly, Josh Brown wrote about this. I think some others did as well. Sometimes we make investment decisions based in part on our relationships and wanting to support others. So, people like Josh or me or Ted Seides or Howard Lindzon and--those are some of the names that come to mind right now--you make a chunky investment in a venture that you believe in not just because you've run the numbers and they look great but because the people behind the project are important to you and you want to support them. And so, as a result, you end up having chunkier positions, bigger positions than you might.

Second, I don't know if it's unconventional wisdom, but the issue of debt and mortgages in particular. I think you saw a number of people in the volume, out of the 25, maybe five or six people indicate that they had paid off their house. And especially given where rates are and how cheap debt is, there's a good technical argument for why you should keep that mortgage, and you can reinvest that cash at a higher rate and effectively capture the spread between those two. People including me have paid off their mortgage because it is a form of financial stability. It's a form of financial independence. It frankly just feels good not to have that bill come due and also to have the sense that you own your home and the bank doesn't own your home. And it's something that you're going to have for as long as you want. I know there's long, sometimes interesting debates over whether people should have a mortgage, and if so, whether that should be--I'd say with this crowd, the conventional wisdom, or the shared wisdom, not conventional, was that paying off a mortgage if possible produces some nonmonetary benefits that are quite valuable.

Benz: Brian, we don't want to spend a ton of time drilling into how you invest your money. But one thing I was surprised about in reading through your essay was your discussion of some of these small private deals and ventures that you're invested in, what you described as “lottery ticket” investments. Can you talk about those, like how you find them, and whether you would urge other people to do that with their own money?

Portnoy: Yeah, it's a personal decision. Well, let's start with: Where does it come from? And I think I pointed out in my chapter; I know Ted Seides pointed it out in his as well--social capital and financial capital intersect in some interesting ways. And you, me, and Jeff, we've been in the industry for a long time. You meet people along the way who are doing interesting and potentially lucrative things. And so, I think the more you hang out in our neck of the woods, you see investment opportunities come around, and that's been the case for me over the last five or 10 years. And some of them are not only interesting, they seem like they're good investments, but that term that you used that I used in the chapter, “lottery tickets,” venture capital, angel investing, very, very risky. I mean, these things aren't meant to make 10% a year for some number of years. You're looking to double or triple or 10x your money over the course of five or eight years or some period of time while at the same time risk losing it all.

And so, I think for an individual investor, they've got to be in a spot where they can lose that money. It's really hard to put together a spreadsheet where you can estimate the probability that certain investments are going to end up in the money and make you multiples, and that you're all in IRR across a portfolio of venture or angel investments is going to make you money. You can make that spreadsheet, but it's completely fabricated, and I wouldn't rely on it for anything. It's something that people should enter very carefully and be financially prepared for most of those investments to go south.

Ptak: If you had to universalize some of the key themes and lessons from the book for the broader investing public, including those who maybe aren't as well established financially or as far along in their careers as your contributors are, what would you cite as those key themes and lessons?

Portnoy: There were a number of key themes that jumped out for me, and in fact, in the concluding chapter to the book I walk through one of those, some of those. Among others, I observed that money is very much an expression of our values and our identity. Now, that's not a dollars-and-cents personal finance observation. But including for folks that are just getting going with their investment career and their careers generally, appreciating that money is just not this numerical thing but it's connected to who we are and who we want to be. And in the book, we had folks in their 20s, folks in their 60s and people in between. So, there was a pretty wide range of life experiences here, and virtually everybody wrote about how money fit into their broader story.

Related to that, I would say money scripts matter. And what do I mean by “money scripts”? These are the stories that we inherit or tell ourselves about money. Money could be seen as a bad thing, as a good thing. It's very much tied to our earlier childhood experiences. One of the contributors, Blair duQuesnay, who's a colleague of Josh's at Ritholtz Wealth, she tells an interesting story about her growing up where she did in the American South and where money fit into her family's decisions. Same thing with Nina O'Neal and Ashby Daniels and Leighann Miko--they all had scripts that to some extent were received as they were given from others and then they had the chance to revise those scripts if they wanted.

Last thing I'll--and there's a number of different themes--but last thing I'll mention and it's a little bit more precise and related to personal finance, but that process matters. And there's no one right way to manage money. I mean, the podcast that you guys have put together, you talk to all these great portfolio managers and it's a real rainbow of different colors. People just doing things different ways, but the best of the best have a process where they have mapped out the steps ahead of time. Yes, these chapters are at times emotional and they speak to people's identities. But you also find across all of them a certain process that the financial expert has put into play for how they're going to think about their short- versus long-term goals, what the appropriate asset allocation is going to be, how they're going to express that allocation through stocks or bonds or funds or other vehicles, what their rebalancing protocol might be, and so on and so forth.

One of the good things about our current communities through social media is that we can see so many different types of people pursue different types of processes. And because there's not one right way, but there's probably a right way for you, sampling all of that and putting something into place that feels right, something that you can stick with, is super important.

Benz: Switching over to your day job, you have a firm, Shaping Wealth, where your focus is financial wellness. And let's just talk about what that term means because I think on the surface it seems really vague and lots of people interpret it different ways. How do you think about that?

Portnoy: Yeah, it's both vague and fashionable. So, maybe that's a bad combination. I define it pretty specifically, and there's been some research or writing on the topic that I have leaned on. To me, financial wellness is a four-part experience, or financial wellness has four dimensions. And I would summarize those quickly as what I call: getting by, solving for emergencies, achieving goals, and funded contentment. And let me elaborate on each of those briefly.

The “getting by” part, which is sort of the day-to-day personal finance part of financial wellness, is being able to pay the bills. We all have homes that we need to afford, and transportation that we need to pay for, and education and clothing and all the basic stuff. And as we know, for many people that in and of itself is a struggle. And so, financial wellness to me starts with just that ability to kind of cover your daily expenses, cover your monthly bills.

Then there's more of a forward-looking covering your bills, which is feeling safe, being prepared for emergencies. We also know that many people don't have just a few hundred bucks to solve a financial emergency if it would come. And so, being able to have a rainy-day fund is another form of financial wellness.

Third, “achieving goals” sounds pretty straightforward. We want to do things like buy a home, send our kids to college. The big one is obviously retirement. So much of our industry is anchored on this notion of retirement. And those are all things in the future that we want to achieve or experience, and the ability to make a plan, make a financial plan, to achieve them is a critical pillar of financial wellness.

And then, there's this fourth issue, or fourth dimension, that I call “funded contentment.” It's a topic that I wrote about in some detail in The Geometry of Wealth, which was the last book that I authored. And to me, that's true wealth, which I define as the ability to underwrite a meaningful life. So, beyond just achieving goals. So, you want to retire with X number of dollars of income per month so you can support whatever lifestyle you want to lead. There's actually, I would argue, a deeper form of being where we achieve contentment through connection to others, through our autonomy, through the flow or competence we express at work and so forth. Being able to afford the things that those provide for us to me is sort of the top of the Maslow's triangle of financial wellness, if you will.

Ptak: In what ways has the pandemic influenced how you approach that topic of financial wellness? You listed off the four dimensions. And so, I would imagine that the first two in that pecking order--getting by and solving for emergencies--there's probably a whole lot more attention that's being paid to those these days, given the fact that it's life's necessities that have become a challenge for many. So, has that caused any sort of reevaluation in the way you approach your definition of financial wellness and the way others should?

Portnoy: It doesn't change the way I define financial wellness, but you're right to suggest that it perhaps changes priorities a little bit in the here and now. People are struggling. A lot of people are out of work. And people are struggling to pay the bills. And so, what I've seen especially from the corporate side of things as those firms scramble themselves just to stay in business and do what needs to be done, this notion of financial wellness, financial well-being, financial health, it seems to be a topic that organizations and companies want to discuss more. I mean, I don't have a long time-series on this. So, it's hard to speak to a specific trend, but it's not at all difficult to raise this topic in an organizational context and have a CEO or head of HR or somebody in a leadership position say, “We'd really like you to speak with our employees about some of the decisions that they need to make in the here and now.” For example, I've given a number of talks over the last few months, all roughly with the title, “Financial Wellness During Times of Crisis” or “Financial Wellness During Volatile Times” and just giving people a vocabulary and a road map for the types of decisions that they might need to make. When crises happen, generally speaking, our sense of time collapses. And so, we might have plans four, five, 10, 20-plus years from now, and that's good. But when there is the type of situation that we have faced over the last few months, it's easy for those plans to go a little bit out the window and we focus on being safe right here. That's front of mind for a lot of people, and it seems to have changed a little bit the demand for the type of coaching and content that I'm in the process of delivering.

Benz: Going back to that term “funded contentment,” I think that resonates with a lot of people. It resonates with me. But I think part of funding contentment is figuring out what makes you content. Can you talk about how you help people approach that discovery process? How do you do this?

Portnoy: Yeah, carefully. It can be a sensitive topic because we can quickly move from sort of the numbers and formulas of finance, which in some strange way feel safe because they're so abstract, and get into true issues as to, well: What's the personal in personal finance?

For me, there are four dimensions to funded contentment or four dimensions to a meaningful life. And I wrote about this at some length in The Geometry of Wealth, and it's based on number one, just my life experience, but also, spending a fair amount of time doing directed research in philosophy and theology and psychology and seeing what common themes exist in terms of sources of contentment.

For me, there's four, and I call them the four C’s--connection, control, competence, and context. The first one is human connection. We are hardwired as social beings. We don’t just like to be around other people--we need to be around other people. We're sort of deeply tribal in nature, kind of small “t” tribal, not the nasty political capital “T” tribal that sort of afoot right now. But we travel in packs, and we like to be around others. It gives us a sense of safety. It also gives us a sense of purpose. That need for belonging is arguably our most important source of contentment.

On the other hand, we've got “control,” or we could say “autonomy,” that sense that you're living the life that you want to lead, and you're not being controlled by others. You can set your own course, and you can tell your own story. And that pursuit of freedom, liberty, opportunity is very definitional of who we are, and when we don't have it, we feel worse, and we feel smaller.

The third form of contentment is what I call “competence.” We might also call it “mastery.” It's the notion that work or our vocation or hobbies are sort of deeply important to who we are. I mean, especially in America, when you go to a party or a conference, the first thing someone asks you is, “Well, what do you do?” And spoiler alert, they don't really care what you do. What they care about is who you are. They want to have some sense of your identity. And we know from our occupations that going into jobs, leaving jobs, just the day-to-day of work, very much impacts our sense of self-worth.

And then, finally, the fourth C is what I call “context,” which is sort of a broader, all-encompassing notion that people who live for something beyond themselves seem to tend to be happier and that there are some long-standing and deep-seated sources of that connection to something bigger than ourselves. I think the obvious one is faith and religion that is so critically important to who people are. But there's also place--nation, community, hometown. Those things are meaningful to us. But there's other things as well. I often talk about sports teams. Both you guys know I'm kind of a rabid Pittsburgh Steelers fan and part of Steelers Nation. And I guess on one hand it’s trivial. On the other hand, it's meaningful to me. I mean, it speaks to my roots. It speaks to positive memories of growing up in Pittsburgh. And I'm connected to that community, at least in the virtual sense.

These aren't quantitative categories. You're not supposed to or even think about rank-ordering these. They don't go from 1 to 10 and if you get 10 on each, so 40 out of 40, you're super content. It doesn't really work that way. There are some nuances and some contradictions and conflicts between these sources of contentment. But being able to raise these issues in a financial advice context is where I think some of the most interesting and exciting wealth management is taking place right now.

Ptak: We're going to talk about financial advice in a moment. Before we did so, I was just curious if somebody was doing a self-audit of sorts, asking themselves, “Am I financially well or am I on the path to financial wellness?” You've laid out these four dimensions. How would they go about that process? What would they want to ask themselves? And then, based on those answers, what would they want to do with that information?

Portnoy: I think the nice thing about the framework is that it lends itself to some pretty practical exercises. We've got four, I think we've got four categories, and each of them is distinct enough for its own blank sheet of paper. On the idea of just getting by, being able to pay the bills--that's a budget. That's cash flow analysis. That's balance sheet. Having a sense of what you own versus what you owe--assets versus liabilities. There's work that you can do with an advisor. There's work that you can do with online tools like Mint, or you need a budget or so many different things that we have on offer these days. But the “getting by” part is very much sort of Personal Finance Basics 101.

The feeling safe or feeling protected piece--in a bigger picture, it's thinking holistically about risk. It's “Hey, what could go wrong in the future and is there anything I can do now to make sure that doesn't happen? Or, if it does happen, the damage that comes is minimized?” The obvious point is insurance. We think about the huge impact of low-probability events, and we want to pay or buy insurance of one form or another to make sure that that doesn't happen. But managing risk isn't just with our financial capital. It's also with our human and social capital. We want to think about our skill set and keeping that fresh overtime about our network and our relationships.

The third exercise or blank piece of paper is “goals achievement.” And what are the things that you want to do in the future? It could be a certain type of vacation. It could be a certain quality of retirement. It's whatever you want. And then, thinking about the cash flow or assets that would be necessary to afford those things in the future. So, again, not always easy, but in some ways a pretty straightforward financial-planning exercise.

And then, the fourth, which is probably the hardest to execute, but I would argue is the most meaningful, is taking those four sources of contentment seriously--connection, control, competence, and context--and doing some work by yourself or with others to figure out what those are and what the kind of financial implications of belonging to a particular community are. Or having--in the control column--having a firm say over where your life is going to go and not being vulnerable to the whims of others. I would argue that's a little bit more complicated, but I think it's time well spent.

Benz: I have a two-part question about financial advice. The first part is: Do you think that this whole--your term “funded contentment”--helping individuals find their aspirations, their life's purpose, do you think that's the next evolution of financial advice? And then, another question is--and you and I have discussed this a little bit offline, Brian--but do you think that some firms are using it as a little bit of a marketing gimmick? I've been concerned because it's begun to be a drumbeat recently.

Portnoy: Yeah, maybe I'm a drumbeater. Let me let me answer the first question first. And the history matters here. It's easy to just get wrapped up with where we are right now. But the wealth management industry hasn't been around really for all that long. Going back more than 30 or 40 years, you had a brokerage business. Now, that's existed for centuries, and that's just buying and selling of securities. And until the ‘80s and ‘90s, capital markets access was not something that was easy or cheap. That began to change in the ‘90s with E-Trade and Schwab, and fast-forward to today, you can basically buy thousands of different securities online effectively for free. It's a sort of a night-and-day experience.

So, the wealth management industry has evolved as technology and consumer preferences have evolved. It was a brokerage business of just selling things, and then advisors evolved into investors and allocators, meaning that they not just said, “Hey, you should buy IBM here or Pfizer there.” They began to assemble portfolios. Beyond that, then there was another phase that started maybe 10, 15 years ago of true financial planning, where it wasn't, “Hey, here's a good portfolio of investments, but this is a portfolio of investments that is tied to whatever your goals are in the short, medium, and long term.”

The challenge along the way is that--and this is true of every industry--things get commoditized. Brokerage got commoditized. The access to a diversified portfolio, that's become commoditized. Now, in the world of planning, there are lots of entrants, Vanguard and Schwab among them, who can put together a very credible financial plan for very, very cheap. And so, the question is, Well, what do financial advisors do to justify what's typically a very premium fee? And one answer, and it's not the only answer, and it's actually the wrong answer for some people, is that there is an evolution in the industry toward coaching. I'm not sure if that's exactly the right word. Maybe it's just helping. But the world is just a very noisy place. We're dealing with more information and more choice than at any point before in recorded history. And financial advisors, in my experience, having met thousands of them over the years, are very interested in just helping their clients lead better lives, helping to navigate difficult decisions.

I do think that for some advisors in certain contexts evolving from broker to investor to planner to coach is a pretty natural flow. But, like you alluded to, as we've discussed offline, that's not necessarily the right move for everybody because it's not necessarily going to be authentic.

So, the short answer to your second question is that it could be BS. I mean, it could be just a marketing spin. But at the same time, I know so many advisors who are so vested in a genuine sense in the lives of their clients, that there are additional tools that we get from positive psychology, behavioral finance, decision science, the coaching field, that those have only just begun to be introduced to this industry. And there's no reason that if we do want to coach our clients to lead better lives generally that we can afford that we wouldn't avail of ourselves the best insights in technology that are out there.

Ptak: You alluded to it before, but there's the potential for a skill mismatch. It's possible that some investment advisors who are very much at home discussing things like bond convexity or Sharpe ratios, or maybe Roth conversion, stretch IRA, you name it, are less comfortable sitting down to discuss their clients' aspirations. And so, based on the work that you've done with advisors and the conversations you've had, how do they skill up or evolve as they will need to in order to stay relevant to these clients?

Portnoy: Yeah, it's a really good question. And, I mean, Jeff, there's a sample bias in who I talk to because I'm not interested in converting. I'm more interested in selling Bibles. So, if someone wants to be a stockbroker, and they think all of this financial-coaching stuff is goofy and silly, that's totally fine. I'm not going to try to convince them to be somebody that they're not. The challenge is neither the hardcore broker who just wants to be wheeling and dealing in the market nor is it the financial therapist who literally and figuratively puts their clients on the couch to talk about deep-seated issues. It's everybody in the middle who is in one way or another pursuing something called “goals-based wealth management.” And to Christine's point or question just a moment ago, that phrase "goals-based wealth management" was sort of invented by some big wirehouse firms who wanted a different wrapper for the same old sales jargon.

If an advisor is interested in talking with their clients about bond convexity and particular diversification strategies or sector rotation, I think, number one, there's a decent chance the client has literally no idea what they're talking about. I don't know many individuals who go to a financial advisor because they basically want a pocket portfolio manager. Maybe some do, but that doesn't seem to be the case in my experience, and that's probably even more true from a generational-shift perspective. I think that's more of an old-school way of thinking about things.

Bottom line, there are going to be some people who pursue a deeper, more sophisticated conversation about goals and objectives, and there are going to be others who just use those as placeholders to sell the right products. And I'm not trying to make it sound like one is wrong versus right. I have a preference, obviously. But I think authenticity is absolutely critical in all of this. To me, the modern advisor is aspirational, adaptive, and authentic. They have an orientation toward growth. They're not just in a legacy business. They're willing to accept that the world is unpredictable, and they're going to change with things. And then, finally, they're going to just be who they are to their clients and not try to be somebody else because people can pick up on that almost immediately.

To me, one of the cool things about the wealth management industry is that it's so large. There are so many advisors and so many clients and potential clients that everything is on offer and just a matter of mapping up people with like minds who can do good work together.

Benz: You've spent a lot of time on behavioral finance over the past decade or more. Do you think that too much of the behavioral finance discussion focuses around investing and investing mistakes? And is it broader, and if so, what do you think are some of the key undertilled, underdiscussed areas in behavioral finance?

Portnoy: Yeah, I love this question because the discipline is evolving in some really interesting ways, and I would say we are in or entering what I call “Behavioral Finance 2.0.” I mean, we all know the backstory, “The Undoing Project,” Kahneman and Tversky. And it's a great story. And then Thaler sort of ports it over to economics.

You're completely right, Christine, that this has been by and large a conversation about the psychology of investing for the last two or three decades, as distinct from the psychology of money more broadly defined. I work with this concept that I call “money life,” which has seven dimensions, and investing is one of them. But there's also earning, saving, spending, borrowing, protecting, giving. All seven of those dimensions have psychological contours. All seven of them we can do better or worse. And among other trends in, I'll call it “applied behavioral finance,” or maybe I should put it differently. I'd say Behavioral Finance 1.0 is kind of conceptual or theoretical. Behavioral Finance 2.0 is applied behavioral finance. I mean, probably the number-one question I've gotten in all the lectures and meetings I've done and reactions to books written, and I know friends like Daniel Crosby have had the same experience, which is, “You talk about confirmation bias or anchoring and all that stuff, which is interesting. But then, the question is, well, how do I use this in my practice? How do I become a better advisor or a better investor as a result of it?” And so, this new world of applied behavioral finance, I think what it is going to do is it's going to focus in part on noninvestment areas, especially saving, spending, borrowing, charity, and look at better and worse decisions as well as habits.

So, there's a lot of interesting work being done in decision sciences. Generally, I've been really lucky to be sitting on the advisory board of something called the Alliance for Decision Education, which was founded by Annie Duke some years ago, and helping people make better decisions, evaluate their options, do premortems, postmortems, things like that, appreciating that there's a difference between making a good decision and having a good habit and, then on top of that, recognizing that a better habit is preferable to a better decision because the habit is less taxing on our brains.

I think all of this in the years to come, and we're really at the beginning stages, is going to be introduced to the general population, but really, the wealth management industry specifically where we're focused on the seven dimensions of money life and not just investing. And we can help people make better decisions and form better habits than they would otherwise. It's actually something that excites me as much as anything going on out there because it's so practical. If done properly, it's relatable and makes a true impact in people's lives.

Ptak: I want to go back to what you referred as, I think, you called it “Behavioral Finance 2.0” or “applied behavioral.” What do you consider to be the biggest breakthrough that you've seen in practice in industry where basically they've gone and applied some of these concepts and it's conferred manifold benefits on investors, savers, and the like?

Portnoy: The answer that I want to give is relatively well known, but the impact has been so large that it can't be ignored. And that's the use of default options and nudges in the retirement savings space. You've got programs like Save More Tomorrow that have effectively flipped the script on the way people had been saving and allocating to their 401(k)s or other employer retirement programs. And by changing the default option from “not invest” to “invest” and then you can opt out--so you haven't lost any freedom or choice in the process; it's just your starting point is different. There's some gargantuan number in the tens or hundreds of billions of additional savings that have been created as a result of helping people form better habits. The nice thing about good habits is that we don't have to think about them. I don't think many of us think about brushing our teeth in the morning, in the evening. We just go ahead and do it. It doesn't require any brain energy. And, as a result, it's just something that we do.

Beyond that, I do think we're at the early stages. There are now technologies through apps and other programs where you can be nudged to save a little bit more or you can kind of round up on a bill and put that extra change to work in a savings context. I think what we see now is a pretty wide but not very deep set of experiments as to how we get people to make better decisions and form better habits. And there are some green shoots, and I think there's some early success like Save More Tomorrow, and hopefully, there's going to be a lot more to come.

Benz: We did a podcast interview with John Lynch at the University of Colorado last year and it was controversial. He shared some research where he found that these broad-based financial literacy efforts in his research do not necessarily lead to better outcomes. My question is: Do you agree with that general thesis? And how do you think financial education, whether you're delivering it or whether it's being delivered in schools, how can it be better? What are some of the things that it can embed to lead to better outcomes?

Portnoy: Important topic. And yeah, I listened to the John Lynch interview very closely, and I very much disagree with his perspective. I feel like he was delivering a set of views that are quite dated, in some cases relying on studies that are five, 10, 15 years old that are recognized by some to be poorly designed and poorly executed. And so, you've got other experts like Annamaria Lusardi, who I follow closely and I feel like her and Carly Urban and my friends at the University of Chicago Financial Education Initiative--and we can get into the details of what we mean by “financial education.” So, they are not just priming the pump to prove that something called “financial education” works. But if you get granular and you look at the decisions that, in this case, young adults make with regard to debt, saving, spending, and so forth, a lot of the current research that's been published over the last several years seems to suggest relatively strongly that interventions in the schoolroom, giving people a sense of what their choice set is, what these concepts mean--I would argue they actually make an enormous difference in people's lives.

Now, I think we can put a big asterisk on that because the serious scholarship on financial literacy isn't that old, and we'll see what the long-term effects are. But in my travels--and my guess given what both of you guys do for a living, you hear this as well--I mean, the demand for practical financial education is everywhere. Financial advisors would like to deliver that to their clients, not just the children of their clients but older individuals as well. When you teach students these topics on saving and spending and borrowing, they seem to enjoy it. And like I said, there are some measurably positive impacts on the decisions that they make.

Yeah, I was really quite disappointed with John's perspective, because number one I think is empirically inaccurate. But number two, from a mission-based perspective, this is something that we need to do--to the earlier conversation about financial wellness and just on the ground floor of being able to pay the bills, use debt wisely. These aren't intuitive. Our brain isn't wired to make great decisions on these topics. And so, people need help. And for as much as we've been talking about financial literacy and financial education in this country for quite some time, here, too, under maybe that big umbrella of Behavioral Finance 2.0 or “applied behavioral finance,” I think the opportunity to change people's lives by introducing them to these concepts, by teaching them how to ask the right questions in the right context, is just critically important.

Benz: Just to follow up, I did feel that his comments about point-of-purchase financial education, or getting the education closer to decision time, made a lot of sense and had a ring of truth. I mean, I'm sure you, like us, have sat in front of high school kids and tried to teach them about asset allocation because that's what you're supposed to do. I mean, there's something that has a ring of truth to it that if people are in no position to use the guidance that you're giving them, why are you doing it, right?

Portnoy: Yeah, I don't know why someone would be teaching 17-year-olds about asset allocation or really investing generally. I mean, I don't know if I'm--well, I can say whatever I want, I suppose. Like, I don't see the point in teaching kids about investing beyond buying a target-date fund or just a basket of index funds. I mean, the sexy part is Robin Hood. The sexy part is betting on a Tesla or whatever. And that's fine. And that's not investing. It's gambling. Let's call it what it is. That's fine. You want to go to the casino and gamble? You should.

But to me, real financial literacy and financial education centers on understanding what key concepts are and especially in the world of saving, spending, credit cards, college debt, those are all, I mean to John's point, I guess, is nominally fine, the point-of-sale or point-of-purchase type advice. I think because the topic is so broad and so complicated and frankly, unbelievably overwhelming and intimidating--even to people who have a lot of money. This is an intimidating topic. We know that through academic studies, but I also know that from meeting thousands of investors, some of whom have tens or hundreds of millions of dollars. And they are overwhelmed with what all of this means.

Teeing people up to feel comfortable, to ask questions is, I think, critically important and also not mutually exclusive. If you're going to take out a loan or purchase a mortgage or buy a car or take out loans for college, whatever the situation is. Of course, there's nothing wrong with having point-of-sale advice. But if you haven't primed younger folks, young adults, to know that it's even legitimate to ask those questions--because many people are just afraid to ask the question. They don't want to look stupid. They don't want to feel stupid. I think they're a hand in glove thing. You need to set a basic framework. And then, you need to give people tools at the times that they need it.

Ptak: You have three teenage children. What's your advice to parents who are listening who would like their kids to become wiser with money?

Portnoy: What follows on from exactly what I was just talking about Jeff--I mean, we'll see if my teenage kids actually make good decisions in the years to come. But maybe I'll answer the question through the lens of the word “transparency.” My wife and I are reasonably transparent about the decisions that we need to make financially related to their college, to a mortgage, to investments that I make or could make--and not treating it like it's a classroom. We don't have a chalkboard or a whiteboard in the house where I'm scribbling things. Sometimes I wish I had one. But including them to the extent that it's comfortable and responsible in understanding the different types of things that we need to figure out. To this issue of “money life,” what does it mean for mom and dad to have a salary? How do we think about spending less than we make and saving the proceeds, and what do we do with those savings short-term versus long-term?

I think maybe part of it is just creating a healthy atmosphere where these issues are not taboo and that they can come up, and including them in the process a little bit, again, in a comfortable and responsible way. So, we love travel. We take nice vacations from time to time. And we include the kids in the process of choosing the things that we want to do, not just from an activities' perspective but from a cost perspective. And I think it's a teaching moment to say, ”We've got these two--we could do an activity on this day--and we can do A or we can do B. A is super cool, but it costs 5 times what B costs.” I'm making stuff up right now, obviously. “But, you know, what do you guys think?” And just have them chime in. So, making it a topic that they're not afraid to engage in. To Christine's point about Lynch's point about point-of-purchase advice: Create young adults who are comfortable asking uncomfortable questions when they need to. I hope that works out.

Ptak: Well, Brian, this is been a really enjoyable and illuminating discussion. Thanks so much for having it with us and our listeners. We really appreciate it.

Portnoy: My pleasure, guys. Always nice.

Benz: Thanks so much, Brian.

Ptak: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts.

Benz: You can follow us on Twitter @Christine_Benz.

Ptak: And at @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)