When Ad­vi­sors Ignore Their Own Advice

Plan­ners’ own fi­nan­cial re­sults might be bet­ter if only they would ac­tu­ally do what they tell their clients to do.

Financial Planning - - CONTENTS - BY AMANDA SCHIAVO

Plan­ners’ own fi­nan­cial re­sults might be bet­ter if only they would ac­tu­ally do what they tell their clients to do.

Just like a doc­tor who pops out­side for a cig­a­rette break, ad­vi­sors some­times de­velop bad habits in their own fi­nan­cial lives.

Although they do their ut­most to ham­mer home the im­por­tance of proper plan­ning, ad­vi­sors don’t nec­es­sar­ily fol­low their own words of wis­dom. They can fall vic­tim to the same be­hav­ioral bi­ases as their clients and end up mak­ing ques­tion­able fi­nan­cial de­ci­sions.

Over­con­fi­dence is one such cog­ni­tive bias that of­ten af­fects ad­vi­sors, says Stephen Wen­del, head of be­hav­ioral sci­ence at Morn­ingstar. He calls it the Lake Wobe­gon ef­fect, named after the myth­i­cal town in the ra­dio show “A Prairie Home Com­pan­ion,” where “all the women are strong, all the men are good-look­ing and all chil­dren are above av­er­age.”

Part of the joke is that not ev­ery­one can be above av­er­age.

But ad­vi­sors can get caught up in the idea that since they’re ex­perts, they are as­sured of not do­ing worse than those who aren’t ex­perts. As a re­sult, they can end up ne­glect­ing their own best in­ter­ests.

“We might give advice to some­body else think­ing they are av­er­age, but of course we’re not av­er­age, so that advice

doesn’t ap­ply to us,” he says.

Of course, this is true of peo­ple across many pro­fes­sions. The say­ing that doc­tors make the worst pa­tients is a cliché for a rea­son.

Aca­demics in the field agree. Ad­vi­sors can also fall vic­tim to sta­tusquo bias, pro­cras­ti­nat­ing or ex­pe­ri­enc­ing in­er­tia “where we make all types of de­ci­sions, es­pe­cially fi­nan­cial de­ci­sions,” says Vic­tor Ric­cia­rdi, a fi­nance pro­fes­sor at Goucher Col­lege. “The idea is that peo­ple don’t like change … and even ad­vi­sors will not nec­es­sar­ily up­date their own es­tate plan­ning.”

Although it’s im­pos­si­ble for some­one to avoid all be­hav­ioral bi­ases, Ric­cia­rdi sug­gests that plan­ners need to un­der­stand th­ese in­stincts bet­ter to help them in ad­vis­ing clients who are fac­ing the same is­sues.

Con­fess­ing Fi­nan­cial Sins

To that end, some brave ad­vi­sors were will­ing to fess up and ad­mit their fi­nan­cial sins to Fi­nan­cial Plan­ning.

The most com­monly cited is­sues were fail­ures to bud­get, a ten­dency to shy away from tough con­ver­sa­tions with fam­ily mem­bers or know­ingly tak­ing on overly risky in­vest­ments.

Some were even more ba­sic — for in­stance, not up­dat­ing im­por­tant doc­u­ments or not re­view­ing re­tire­ment plans for years.

Doug Boneparth of Bone Fide Wealth in New York City ac­knowl­edges he doesn’t al­ways put money away for his own re­tire­ment, which is far in the fu­ture, and in­stead lets it build up in a re­serve fund. He says he’s “on this kick of ac­cu­mu­lat­ing cash” in or­der to “feel bet­ter” about mov­ing re­tire­ment sav­ings down on his list of goals after he and his wife had a child and bought a home a few years ago.

Es­sen­tially, he says, he’s be­ing even more con­ser­va­tive for him­self than he would rec­om­mend for clients.

“Does that con­flict with the advice that I give?” he asks. “Not nec­es­sar­ily, but it’s a chal­lenge. Maybe I should be look­ing closer at that mix about how much goes into re­tire­ment ver­sus cash re­serves.”

Sim­i­larly, Ryan Mar­shall, a CFP who is a part­ner at ELA Fi­nan­cial Group in Wy­ck­off, New Jersey, con­cedes that he doesn’t re­view his re­tire­ment plans once a year as he does with his clients. In­stead, he does such a re­view only “once ev­ery four or five years.”

Risk man­age­ment is an­other area where there is a dis­crep­ancy be­tween what ad­vi­sors say and what they ac­tu­ally do.

Matthew Gaf­fey, se­nior wealth man­ager at Cor­bett Road In­vest­ment Man­age­ment in Mclean, Vir­ginia, notes the tra­di­tional strat­egy of hav­ing re­tirees ramp down the risk in their port­fo­lios, which he notes should be more akin to “pump­ing the brakes rather than slam­ming them.”

Whereas Gaf­fey might ad­vise clients to pro­gres­sively re­duce risk in their port­fo­lios over time, he’s more com­fort­able hold­ing risk in his own in­vest­ments. He noted that other ad­vi­sors take that same ap­proach.

On a lighter note, Mar­shall ques­tions whether re­tire­ment will be in his fu­ture at all. “I don’t think I want to re­tire ever,” he says with a laugh. “I’m giv­ing peo­ple advice to re­tire [but] I re­ally like my job. Granted, I’m still young. I’m 36 years old, so I have a lot of time. But I truly en­joy my job.”

Here are some of the ma­jor short­com­ings that th­ese and other ad­vi­sors ac­knowl­edge when they re­flect on things that they’re say­ing to clients but not ac­tu­ally do­ing them­selves:

Lack­ing the Pa­tience to Bud­get

Mar­shall con­fesses that he be­lieves his big­gest fault is putting off cre­at­ing a monthly bud­get.

In­stead, he takes a short­cut. “I cal­cu­lated how much I need to save for the re­tire­ment that I would like to have and just make sure I save an ad­di­tional 5% more than that amount each month,” he ex­plains.

“As long as I am putting that away and I have my emer­gency fund set up, I don’t bud­get. How­ever, some clients re­ally need to bud­get. But I don’t have the pa­tience or time to sit down ev­ery month and come up with a plan.”

De­lay­ing Up­dates on Doc­u­ments

“What I ad­vise my clients to do pe­ri­od­i­cally, and what I am not par­tic­u­larly good about do­ing for my­self, is check­ing on, and up­dat­ing when nec­es­sary, my es­tate plan­ning doc­u­ments ev­ery three to five years,” says Ge­orge Gagliardi, the founder of Coro­man­del Wealth Man­age­ment in Lex­ing­ton, Mas­sachusetts.

“Yes,” Gagliardi con­cedes, “this shoe­maker is bare­foot with re­gard to es­tate plan­ning advice.”

Lack­ing Nec­es­sary Dis­ci­pline

Scott Bishop, ex­ec­u­tive vice pres­i­dent and di­rec­tor of fi­nan­cial plan­ning at STA Wealth Man­age­ment in Hous­ton, says one of his flaws in his man­age-

ment of his per­sonal fi­nances is hav­ing an in­vest­ment plan and then not hav­ing the dis­ci­pline to stick with it.

“I think fi­nan­cial ad­vi­sors see so many in­vest­ment op­por­tu­ni­ties that they don’t stay dis­ci­plined,” he says. “I have done that at times in my ca­reer.”

Par­a­lyzed in Bud­get Re­views

“Devel­op­ing a good un­der­stand­ing of your bud­get is an in­valu­able tool to help you pri­or­i­tize your spend­ing and build your net worth,” says Marielle Schurig, a CFP who is an ac­count vice pres­i­dent at UBS Fi­nan­cial Ser­vices in New York City.

“How­ever, bud­get­ing seems like such a re­stric­tive thing, which is why many peo­ple freeze up when they talk about it and why they don’t stick to it,” Schurig says.

“Since a bud­get isn’t static, I of­ten don’t take the time to do an emo­tional au­dit of my spend­ing and re­view my bud­get as of­ten as I should,” she says.

“This is one of the many rea­sons that work­ing with a fi­nan­cial ad­vi­sor is so im­por­tant be­cause they can hold you ac­count­able and re­mind you to check in when nec­es­sary,” she adds.

Avoid­ing Tough Con­ver­sa­tions

Scott Ped­vis, man­ag­ing di­rec­tor of in­vest­ments at Wells Fargo Ad­vi­sors in New York City, cites the ten­dency to avoid tough con­ver­sa­tions as a com­mon fail­ing. He got a first-hand demon­stra­tion of how to do it.

“I once had a client with an adult child, per­fectly ca­pa­ble of work­ing, who lived off the client,” Ped­vis re­counted. “One day, after the child asked the client for money to buy a lux­ury res­i­dence, the client asked me what I thought he should do.

“I ex­plained that while it’s ul­ti­mately the client’s de­ci­sion, I thought the res­i­dence in ques­tion was too ex­trav­a­gant and that if the client wanted to re­ally help the child, he should ex­plain why the child needs to start to fend, at least in part, for him­self fi­nan­cially.

“No one likes con­flict, es­pe­cially in fam­ily re­la­tion­ships, but I felt it was my job to give the client my hon­est opin­ion … I know if the roles were re­versed, it would be very hard for me to fi­nan­cially deny a fam­ily mem­ber be­cause I un­der­stand the strain and stress that would put on a re­la­tion­ship.”

Not Mas­ter­ing Cash Flow

“I found my­self ask­ing my clients to re­view and an­a­lyze their ex­pense data in or­der to be­come mas­ters of cash flow,” Boneparth says. “How­ever, rec­on­cil­ing and cat­e­go­riz­ing ex­pense data can be time-con­sum­ing, so I didn’t find my­self prac­tic­ing what I was preach­ing.

“How­ever, at the end of last year, I did com­mit to the prac­tice so that I could truly un­der­stand what I was ask­ing my clients to do and look into find­ing so­lu­tions to re­duce the heavy lift­ing,” he says. In the end, “it was a very re­ward­ing ex­pe­ri­ence.”

Liv­ing Too Lav­ishly

Bishop, the Hous­ton plan­ner, cites an­other com­mon prob­lem among ad­vi­sors. “[Plan­ners aren’t] dis­ci­plined in their spend­ing and [need to be] more thought­ful about toys like cars and boats,” he says. “I think that as many fi­nan­cial ad­vi­sors grow their prac­tices, they tend to make more money and thus have life­style creep.

“[They are] buy­ing a larger home, nicer car, bet­ter trips and other toys with­out hav­ing a good bud­get and/or dis­ci­plined sav­ings plan.”

Tak­ing on Too Much Risk

In dis­cussing ad­vi­sors’ ap­par­ent will­ing­ness to per­son­ally as­sume more risk than they en­dorse for clients, Gaf­fey says, “While we con­sis­tently dis­cuss the re­duc­tion of risk over time with our av­er­age client, many of the ad­vi­sors we work with do not want to fol­low that same glide path and pre­fer to re­main much more eq­uity-driven within their own port­fo­lios.

“I be­lieve much of this is driven by our un­der­ly­ing faith in the mar­ket per­form­ing well over time. Many plan­ners are com­fort­able tak­ing on that risk with their own money but would be re­luc­tant to ever sug­gest a client do the same.” FP

Ryan Mar­shall of ELA Fi­nan­cial Group in Wy­ck­off, New Jersey, re­views clients’ re­tire­ment plans an­nu­ally, but he does his own only ev­ery four or five years.

When Ryan Mar­shall, a part­ner at ELA Fi­nan­cial Group in Wy­ck­off, New Jersey, speaks, Ryan Mar­shall the in­vestor doesn’t al­ways lis­ten.

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