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/[email protected]@daniel_egan