Bob Seawright, a chief investment and information officer at Madison Avenue Securities, unpacks the differences between investing and financial planning, and which skeptics investors should be listening to when evaluating financial decisions, on Morningstar's The Long View podcast.
Talking about the role of simplification in financial planning, Seawright discusses how financial advisors need to manage the behavior of their clients, facing the dilemma of mediating what their clients want and what they actually need. What they need, Seawright points out, is to have advisors who will build a plan and have them stick to it. However, investors want to pay advisors for advice at the top of the “Advisor Pyramid of Influence,” as Seawright calls it, skipping over the base of the pyramid: financial planning.
Here are a few excerpts on investing advice, financial planning, and investor decision-making, from Seawright's conversation with Morningstar's Christine Benz and Jeff Ptak:
What role do skeptics play in investing and financial planning?
Jeff Ptak: In your own writing you talk about the value – valuable role, I should say, that skeptics can play in maybe clarifying our own thinking or just adding to a diverse pool of ideas. You're very well read and very plugged in to what's going on, especially when it comes to financial advice and investing. Who are skeptics we're not paying enough attention to right now within the investing or financial advice fields and what are they saying?
Bob Seawright: I think there are probably two broad categories of areas we're not paying enough attention to, and it's not so much that they are skeptics of any particular approach. It's that they are skeptical of the way and the ways we evaluate what's important. The one example I'm thinking of is the distinction between financial planning advice and investment advice. We, too readily, I think jump to investment advice when that is only, in my view, secondary to financial planning advice. And good investment advice in a vacuum doesn't help you all that much. It has to be based upon a plan that makes sense and is productive and promising to provide for one's future. And so, I think we generally don't pay enough attention to financial planning questions as opposed to investment questions. We will spend an immense amount of time trying to eke out 5 extra basis points in an investment strategy and not spend nearly enough time about how we can invest in a tax-efficient way that could save us multiple times those 5 basis points.
At the other end, I don't think we pay enough attention to what to do post-retirement after we have "won." I've alluded to it before. I'm sure you guys have both read Brian Portnoy's great book "The Geometry of Wealth," which talks about our whys which we've already talked about as well and funded contentment and how we get that but even more prominently for lots of my clients, what to do when we have attained it and how we go about living our lives at that point. I see lots of people in retirement that see retirement as a big goal without necessarily having thought out what their retirement is going to look like. And that's a big question for me personally. I turned 65 last week and retirement is not a far-off thing for me anymore. I hope it's years away. But I can't assume that it is because, I'd like to work for a long time still, but health may not allow that. Not that I have any health issues; I don't. But who knows what could happen? As I get older the chances of something like that happening increase dramatically. So, I think that they aren't really skeptics, but I think we need to pay more attention on the front end before investing and on the back end after we have successfully invested.
How can advisors align what the client wants and what the client needs?
Christine Benz: So, do you think the advice profession overemphasizes decision-making in the way it markets itself to clients? And also given the way in incentives are structured, I have to imagine that a lot of advisors think it's hard to charge 1% per year for simplifying someone's financial life, even if it's the right thing to do versus doing things that have perceived value but require decisions, either now or in the future?
Bob Seawright: One of the most difficult dilemmas in our business is that the advice clients need does not frequently line up well with the advice clients want. And we know from a variety of studies that managing behavior is probably the most important thing we as advisors can do. But the list of clients who think they need that advice is a short one, indeed. And so, the difficulty for our business is to manage those things in a way that is helpful for clients but also works from a business standpoint. And that is an ongoing and difficult dilemma that I don't have a great answer for. I wish I did. I wrote a piece years ago now about a pyramid of advisor--forget what I called that--a pyramid of advisor influence or something like that. And the stuff that clients want to pay for is at the top of the pyramid that has the least value in the aggregate. And the most important stuff at the bottom, they think they have covered just fine, even when they don't--especially when they don't.
Do advisors need to practice behavior modification?
Jeff Ptak: Yeah, I wanted to follow up on that. I mean, it is curious. You do hear a number of advisors out there who sell on behavior modification. But like you just said, that will not resonate with certain it sounds like large subset of prospective clients who feel like they're okay and they're looking for something else. And so, I guess, in your mind as somebody who's been in the business a long time, what explains that disconnect? Why do advisors continue to push that if that's not something that's really going to click with whoever it is they're pitching their services to?
Bob Seawright: Well, there are two ways to look at it. You can look at it from the advisor perspective, or you can look at it from the client perspective. From the client perspective, I think it's pretty obvious. We all tend to overconfidence, and we all tend to see what we want to see. So, we look back at our past and say, yeah, I might have made mistakes, but I've done pretty well overall, and I know what those mistakes were, and I'm not going to make them again. And so, I don't have a problem there. Instead, give me the next Amazon please.
And from the advisor side, it is a balance between the advice clients need and the advice clients think they want. And the honest advisor will say, you know what, an important part of my job is to help you stick to your plan. Now, some people frame that in terms of behavioral coaching. I haven't seen that work very well. I prefer to think of it in terms of developing your plan and helping you implement your plan, which I know is going to involve some behavioral coaching. And that's a lot easier to do when you can, for example, point to an investment policy statement that says, I'm going to do X, Y and Z and then when A, B and C happens, this is how I'm going to follow up. If you've established that carefully and in writing ahead time and they see their signature or their initials next to each of those, it's easier for all of us to stick to it instead of the latest silly idea they found on the Internet.