Closing the Behavior Gap: Improving Investor Management

Daniel EganHead of Behavioral Finance & Investing

- Investing since 18 (years old, not 2018)- Wealth management since 2006- Worked with HNW advisors @ Barclays- Trained CX to help ~400,000 clients @ Betterment- Understand interactions of design, behavior, tech- Obsess about why people make bad financial

decisions

My perspective

How valuable is the perfect advisor?

Source: Vanguard, 2018

Unstable

Debt

Stable

Minimal future solvent

Maximal future solvent

Adapted from Blanchett: Retirement success: A surprising look into the factors that drive positive outcomes, ASPPA Journal

De-cumulating

Income

Debt

Spending

Investing

No amount of alpha will save a bad retirement plan.

Your time and attention is your most precious resource.

Spend it wisely.

Filter to ‘good’ clients

Get to ‘no’ (for the right reason) ASAP

● Find why either party might need to say ‘no’ as quickly as possible

● Be transparent about what you won’t do

● Don’t spend your time speaking with the clients to find out why to not work with them

Source: Jarvis Financial

Align service expectations

What we do

✓ Goal based investment ✓ Goal based savings advice✓ Tax loss harvesting✓ Asset tax location✓ Retirement planning✓ Roth/Traditional account advice✓ Annual check-up

What we don’t

● Stock picking / market timing● Insurance advice● Trust legal set-up● Estate planning● Legal services● Tax reporting● Frequent phone calls

Efficient Onboarding

Onboarding efficiently and scalably

Seamlessly opening new accounts

Non-investment alpha

Income- Giving - Taxes - SpendingSaving

Income - Giving- Taxes - SavingSpending

Income

- Plan appropriately- Greater hourly rate for time- Bootstrap external sources - Don’t forget to ‘buy’ happiness

by working less

Source: Kitces

Taxes

Don’t minimize taxes.

Maximize after-tax returns.

The delayed cost problem

January January April

$1,000 short-term capital gain

$500 Tax

Before an action (allocation change, withdrawal), provide the likely tax impact.

The client can decide if it’s still worth it on an after-tax basis.

Communicate tax impact before a transaction

✅

Source: Betterment Analysis

Tax preview reduced market-timing

- Don’t track… plan & automate- Spend what you don’t save- You won’t spend what you can’t see- Have a shock absorber

Spending / Saving

Lifestyle creep

- Double whammy - Reduced savings- Increased income needs

Source: Kitces

Source: Kitces

Preventing lifestyle creep

- Escalate savings by small amounts over time

- Dedicate x% of each raise or bonus to saving

- Avoid peer comparisons (?) and conspicuous consumption

Why aren’t people saving in 401(k)s?

2 in10 Participation rate

3.5% Savings of

percent income

8% recommended

Source: Save More Tomorrow

Up to you. No. Yes. Up to you.

Savings rate?

Saving by default?

Means spending less money?

Future updates?

Source: Save More Tomorrow

Savings rate?

Default?

Up to you. No. Yes. Up to you.

Means spending less money?

OverloadInertia Loss aversion Myopia

Future updates?

Savings rate?

Default?

3% + Yes. Nope. Automatic.

Means spending less money?

OverloadInertia Loss aversion Myopia

Future updates?

Save More Tomorrow Results

9 in10 Participation rate

13.5% Savings of

percent incomeSource: Save More Tomorrow

Monitors checking and saving account daily

Deposits if conditions are met

Easy to skip a given deposit

> $1,200 average deposit, 19% more in first year (based on internal data gathered)

SmartDeposit

SmartDeposit: Auto-Deposit, But Smarter

Use Goals

Helps clients:

- Avoid under-saving- Align risk management- Leverage mental accounting- Match assets and liabilities- Minimize debt

Benefits of goals are widely known

Read more: http://bit.ly/GBSuccess

No goals

Goals

Pictures

+64%

+32%

Carry goals through all client interactions

First Road Advisors

Account, Fund, Sector Reporting Goal-Level Reporting❌ ✅

The Journey

Great expectations disappointments

1. More than I invested?2. More than a savings account?3. More than inflation?4. More than SPY/DOW/QQQ? 5. More than my peers?

Align Expectations

Familiarity is truth> Frequent small items

> Tie back to what is always true

> Share others work: social proof

> Avoid negating: just posit

The primary driver of if we believe something is familiarity and social proof.

What is your ‘propaganda’ for your clients?

The more you send and share content that aligns with the message you want your clients to hear, the more believable your message is.

Align expectations of performance

Simulated experiences de-sensitize clients to

volatility

● Make sure risk profiling aligns both short-term and long-term expectations

● Provide clients intuition for how much they can lose in the short run

● Use scenario-planning technology to help make this more efficient

Illustrative example only

Align expectations of your activities during downturns

What we don’t do

● Try to avoid drawdowns● Try to time the bottom● Change your target allocation● Hedge or use expensive

derivatives

What we will provide

✓ Rebalance✓ Harvest losses✓ Ensure goals are on track✓ Revisit unattractive appreciated

holdings if tax opportunities arise

Human biases affect advisors too! Use technology to make sure you keep your word.

✅

Handling a market drop

Provide comfort effectively

Provide communications in context (e.g. only when logging in, only along with goals)

Do not blast communications to all clients. Know who needs it and who doesn’t.

✅

GameplanFirebreak: Tell them you’re happy to discuss. You want to do it high-quality, so take a few minutes to prep. Put them on hold.

Get in their perspective: Take a look at the details on their account. Look at when their largest deposits were, and their cumulative and annualized performance returns.

Center: Take 5 deep breaths and accept you are about to enter an emotionally charged conversation. It’s your job to not get emotional too.

Listen: At this point your job is not to answer them. It is only to understand them. Avoid any assumptions. Ask them what their concerns are. Help them work out exactly the what the issues are.

Let them vent as long as they need.

When they sound like they’re done, make sure they really are:

Is there anything else you’re concerned about? I want to prioritize the most important things.

Fully deflate

People often have shields up/filters on about inbound facts. This can make it hard for them to integrate new facts.

Use the side door: ask them questions.

Use the side door

We picked a 90% stock portfolio, which we knew had lost 50% in 2008. Did we pick the wrong risk level?

I thought you were investing for 20 years, and that you were happy to let it compound. Did we get that wrong?

If you think the market is going to fall, we should short it. Do you want to do that?

Managing yourself

Your time and attention is your most precious resource.

Spend it wisely.

Smart servicing

Value to customer

Human

Tax loss harvesting Asset

location

Behavioral coaching

Rebalancing

Retirement withdrawals

Asset allocation

Algorithm

Staying on top of client status

Managing client load

Illustrative example only

Example goals achieved:

● More time with clients

● More time prospecting

Try a task and time analysis

Look at:

● TIME taken by tasks

● WHO does each task

✅

Illustrative example only

Understand why - Investing Journal

Understand and record why actions are taken.

Feed back into recommendations and future conversations.

✅

Recap1. Targeted Prospecting

2. Efficient Onboarding

3. Use Goals Effectively

4. Align Expectations

5. Smart Servicing

DisclosuresThis presentation is for investment professionals only. It is for educational purposes and not intended to be relied upon as investment or tax advice. All images are for illustrative purposes. For more information, visit Betterment.com

Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and Betterment's charges and expenses.

Investments: Not FDIC Insured • No Bank Guarantee • May Lose Value.

Visit bettermentforadvisors.com for more information. © 2018 Betterment LLC

This presentation is for investment professionals only. It is for educational purposes and not intended to be relied upon as investment or tax advice. It is not intended for use by private investors. All images are for illustrative

purposes.Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and Betterment's charges and expenses.

Investments: Not FDIC Insured • No Bank Guarantee • May Lose Value.

Visit bettermentforadvisors.com for more information. © 2018 Betterment LLC

How could I improve?

bit.ly/EganFeedbackdan@betterment.com@daniel_egan