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How an Adviser Can Help Simplify an Individual's Life

If advisers can help people focus on the things that matter and the things that they can control, they will be happier and, as a by-product, they can be better investors

Jason Stipp 17 June, 2013 | 11:30AM

Carl Richards gives the 2013 Morningstar Conference closing keynote.

"Please, please, please, let's make this simpler for people," Carl Richards pleaded during his closing keynote to advisers at the 2013 Morningstar Investment Conference. "Trust me, people are willing to pay for and are very interested for you to simplify their lives."

Richards – a financial planner, director of investor education for the BAM Alliance and a regular columnist for MorningstarAdvisor magazine and MorningstarAdvisor.com – made the case that advisers should stop constantly searching for the next great investment or perfectly optimised portfolio strategy and instead redouble their efforts to listen to, connect with and design a plan around their clients' goals and worst behavioural instincts. 

Investors' bad behaviour is particularly destructive. The average gap between stated fund returns and investor returns, Richards said, is 144 basis points – a difference he calls "the behaviour gap" – driven by investors buying and selling at the wrong time.

"We talk about this in conferences," he said, "but we haven't fixed it yet." 

So how can it be done? Richards offered the following:

1. Admit we--advisers--are part of the problem
Maybe the predominant part of the problem, Richards said. "Most of the money in mutual funds is still 'advised,'" he added. "If investors are chronically underperforming their investments, we're a part of the problem." 

To help investors overcome their bad behavioural tendencies, advisers will have to overcome their own, Richards stated. "We have a huge issue with confirmation bias: having a theory and then going out and finding evidence to support it and dismissing anything that disagrees with you." 

2. Start talking about money
There are four things around the world we don't talk about in polite company: politics, religion, sex and money, Richards said. This is where advisers can really add value.

An adviser's office is one of the few places where people can feel comfortable discussing their finances. A good adviser can even do what a spouse often cannot. "Couples spend a lot of time talking around money because they don’t know how to talk about it. We've never been trained," Richards said. "It's not about maths. Clients don't need you because of the size of your calculator. They need you to talk about money with them."

3. Focus on 'why'
Portfolio design doesn't matter until we understand why, Richards said. "Stop prescribing before we diagnose."

Though he warned, "This is an intense business when you start to open up the 'why are you investing?’ People pay for you to take on stress and worry."

But advisers can reduce the stress on themselves and their clients by shutting off the news and eliminating as much of the noise as possible. This applies to advisers themselves, as well as their clients, Richards said. "When clients are paying attention to noise, we call it dumb. When we do it, we call it research."

4. Embrace simplicity
Some advisers may have an idea that without emphasising the complexity of investing, there would be no reason for people to hire them. Not so, Richards argued. At one time, clients had to call advisers just to get a stock quote, for access to information. The fact that such information is now readily available, as well as several websites and tools that enable investors to do it themselves, hasn't diminished the need for advisers, he said.

"Complexity is not a good tool to generate long-term trust with your clients," he said. "If we can help people focus on the things that matter and the things they can control, they will be happier, and as a by-product, they can be better investors."

5. Make planning a process
The advisory industry spends so much time on investment products, and although that's important, Richards said, it's the least important part of the process. Instead, clients need help making a plan and adjusting it along the way to actually realise their objectives. 

"Would you ever spend a lot of time arguing about whether to take a plane, train or automobile on a trip before you decide where you're going?" he asked. 

Once the plan is made, Richards said real value is had in the ongoing relationship with the client, as surprises (both client-related and market-related) must be navigated in an unpredictable future. 

"I know as soon as you walk out the door, the plan will be wrong," he said, "but that's why it's a relationship. I will be there when the situation changes.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Jason Stipp  is Editor of Morningstar.com, the sister site of Morningstar.co.uk.

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