Be The Benchmark

Dr. Daniel CrosbyDr. Daniel Crosby, President, IncBlot Behavioral Finance

If you’re like so many Americans, you probably made a list of your goals for 2014 back in January on New Year’s Eve. Whatever form those resolutions took; whether the goals were physical, financial, or relational, they likely had two foundational elements: they were specific to you and they were aspirational.

More than half way into the year, you may or may not still be on track to meet your goals. But regardless of your current progress, they will stand as personal reminders of the person you could be if you are willing to do the necessary work. As silly as it may sound, let’s imagine goals that violate the two assumptions we mentioned above.

Can you conceive of measuring your success relative to a goal that had nothing to do with your particular needs? What about setting a goal based on being average rather than exceptional? It defies logic, yet millions of us have taken just such a strategy when planning our financial futures!

shutterstock_171191216There is a long-standing tradition of comparing individual investment performance against a benchmark, typically a broad market index like the S&P 500. Under this model, investment performance is evaluated relative to the benchmark, basically, the performance of the market as a whole.

Let’s reapply this widely accepted logic to our other resolutions and see how it stands up. The CDC reports that the average man over 20 years of age is 5’9 and weighs 195 pounds. If we were to use this benchmark as a goal-setting index, the same way that we do financial benchmarks, the average American male would do well to lose a few pounds this year to achieve a healthier body mass index (BMI). Should we then dictate that all American males should lose ten pounds in 2013? Of course not!

The physical benchmark that we used is disconnected from the personal health needs of those setting the goals. Some of us need to lose well more than ten pounds, others needn’t lose any weight and some lucky souls actually have trouble keeping weight on (I’ve never been thusly afflicted).

A second problem is that affixing your goals to a benchmark tends not to be aspirational. The goals we set should represent a tension between the people we are today and the people we hope to become. When we use an average like the benchmark for setting our financial goals, we are settling in a very real sense. No one sets out to live an average life. We don’t dream of average happiness, average fulfillment or an average marriage, so why should we settle for an average investment?

The bulk of my current work is around addressing the irrationality of using everyone else as your financial North Star. Through a deep understanding of your personal needs, your advisor should be able to create a benchmark that is meaningful to you and your specific financial needs. After all, you have not gotten to where you are today by being average. Isn’t it time your portfolio reflected that?

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of IncBlot Behavioral Finance, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor

The Power of Purpose: The Benefits of Goals-Based Investing

Dr. Daniel CrosbyDr. Daniel Crosby, President, IncBlot Behavioral Finance

I recently had the opportunity to speak about how investor behavior is a driver of the future of the financial services industry and the impact that it has when working with clients at the 2014 FSI OneVoice conference in Washington, D.C.

Much of behavioral finance’s departure from traditional financial models centers on the respective approaches’ vision of what constitutes “rational” behavior. Traditional approaches take a simple, objective approach—rational behavior is all about optimizing returns. Through a behavioral lens, rationality takes on a more subjective view and could be construed as making decisions consistent with personal financial goals. The behavioral approach is constructivist, in that the client sets the parameters for rationality through the articulation of personal goals. But by drawing out the financial goals of their clients, advisors do more than simply highlight a finish line; they actually catalyze a positive behavioral chain reaction.

Consider the followings ways in which having deeper conversations about client goals might make your job easier and improve your clients’ behavior:

Crosby_PowerofPurpose_3.6.14Purpose increases influence – The reasons why successful advisors are highly compensated and most trainees burn out within a few years are one in the same–selling is difficult. All too often, advisors are selling the wrong thing, focusing on the “What?” instead of the “Why?” In his excellent TED talk, Simon Sinek suggests that most uninspired business transactions deal with the particulars of a product or service rather than the underlying motivation. Rather than providing your clients with a laundry list of your services, help them understand how your efforts will help them reach their “why.” As Sinek says, “People don’t buy what you do, they buy why you do it.”

Meaning brings clarity – One of the reasons why people fail to save in the now is that it is construed as a loss. In an environment where expensive trinkets can tempt us with each click of the mouse, it can be difficult to put off for a rainy day what could provide more immediate pleasure. Once again, a goals-based approach can help. We know we need to save for some distant date, but the picture we have of the future tends to lack color, which can making saving a burden. By articulating a series of future meaningful goals, advisors can ensure that their clients have this larger “yes” burning inside.

Crosby_PowerofPurpose_3.6.14_2Goals provide comfort in hard times – Viktor Frankl, the Austrian psychiatrist and Holocaust survivor, has written beautifully about the power of purpose in his classic, “Man’s Search for Meaning.” Frankl noticed early on that much of what differentiated hope from a failure to thrive among prisoners was a connection to something bigger than the here and now. For those rooted in the horror of the present, it was exceedingly easy to find reasons to despair. But for those able to look forward to something more, their pain was couched in terms of aiding their long-term goals, which provided them some succor.

While I am in no way trying to draw a straight line between Frankl’s experience and that of a worried investor in a time of market panic, the truth remains that focusing on purpose has a calming effect. Rather than being swept up in the pain of the moment, goals-based investors are better able to understand that they are enduring a momentary discomfort on the path to achieving the things that matter most to them. Are your clients sufficiently tuned in to their personal North Star to aid them when times get rough?

If behavioral finance has taught us anything, I hope it is that true wealth is more about a life well lived than achieving a particular rate of return. In a single act, advisors can improve relationships with their clients, get them excited about the investment process and provide them with a buffer against hard times. Why not?

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of IncBlot Behavioral Finance, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor