Daniel Kahneman and Amos Tversky legitimized behavioral economics—the study of how people really behave around money, as opposed to how economists say a rational person ought to behave.
Then Richard Thaler and Cass Sunstein applied the lessons of behavioral economics to everyday life with their book Nudge. The duo nudged so successfully that in recent years, their prescriptions have been put to work in corporate retirement plans—and even public policy—on a global scale.
When I spoke to Thaler to discuss his newest book, Misbehaving, a series of stories documenting the rise of behavioral economics, he told me that he has a message for those who seek to employ his methods:
Like the Blue Jays’ Daniel Norris, a good financial planner is true to him- or herself.
“Stop asking questions, Maurer, and do what I tell you to do,” said the general agent for the Baltimore region of a major life insurance company.
“I made over a million dollars last year!”
“I buy a new Cadillac every two years — cash on the barrelhead.”
I was told how to dress: Dark suits, white shirts, and “power ties” that weren’t too busy. Light blue shirts were allowed on Wednesdays. Never wear sweat pants, even to the gym. Enter and exit the gym in a suit. Your hair should never touch your ears or your neck. Facial hair was strictly forbidden. Jeans, outlawed.
Few things seem more diametrically opposed than managing money and spiritual enlightenment. But not everyone sees it that way. Some very influential people in the financial advisory community have dedicated their lives to helping advisers assist clients deal with the more personal elements in personal finance.
Consider George Kinder, the Harvard-trained economist-turned-philosopher-turned-CPA. He managed to evolve his tax practice into a comprehensive financial advisory offering, with supporting methodology, while on the successful path to becoming a Buddhist teacher based in Cambridge, Mass. and Hana, Hawaii.
Within the advisory community, Kinder is almost universally known as the “father of life planning.” To many advisers, his work is the seminal, much-needed missing link between life and money. He originally articulated his views in his book, The Seven Stages of Money Maturity. Many more advisers, however, envision Kinder playing the ukulele on a magic carpet — just a little too “out there” for mainstream consumption and practical application. Having moved from the camp of skeptics to the camp of adherents myself, I invite you to consider what could become one of the most valued tools in a financial planning practice: George Kinder’s Three Questions.
The most important event in my life is one of which I was long ashamed.
I was an 18-year-old punk with a monumental chip on my shoulder. You know, the kind of kid certain of his indestructability, sure of his immunity from the dangers of self-destructive behavior.
At 2:00 a.m. on a random Wednesday morning in June 1994, after a long day and night of double-ended candle-burning, I set out for home in my Plymouth Horizon. At the time, my car was bedecked with stickers loudly displaying the names of late-60s rock bands. No shoes, no seatbelt, no problem.
Not even halfway home, I was awakened by the sound of rumble strips, just in time to fully experience my car leaving the road and careening over an embankment. After rolling down the hill, the vehicle settled on its wheels and I, surprisingly, landed in the driver’s seat. But all was not well.
Broken glass. My right leg was visibly fractured. I had hit the passenger seat so hard that it was dislodged from its mooring. Blood dripped on my white T-shirt.
True story: Many years ago, I was meeting with a married couple for an initial data-gathering session. Halfway through the three-hour meeting — the first stage in developing a comprehensive financial plan — the husband excused himself for a bathroom break. As soon as the door shut, the wife turned to me and said, “I guess this is as good a time as any to let you know that I’m about to divorce him.”
To really help people, financial planners have to delve into the the feelings and emotions that drive their clients’ financial decisions. One planner explains why that’s so hard.
While most of us financial advisers want to do the best for our clients, we often struggle at the task.
The main problem, as I recently wrote: We don’t know our clients well enough. We may say that a client’s values and goals are important, but most of us don’t adequately explore these more personal (a.k.a. “touchy-feely”) parts of a client’s life.
Why is this?
One reason we avoid deeper discovery with clients: No matter how we’re paid—whether by commissions or fees—most of us don’t get compensated until the financial planning process has neared its end.
I’ve heard it estimated that out of all the financial and estate planning recommendations that advisers make, their clients ignore more than 80% of them. If there’s even a shred of truth in this stat, it represents a monumental failure of the financial advice industry.
To explain why, let me tell you a story about a financial planning client I worked with a few years back. In one of our first meetings, she and I were reviewing her three most recent tax returns. As I discussed them with her, it became clear that the accountant who had prepared those returns — an accountant who had been recommended to her by her father — had filled them out fraudulently. A bag of old clothes that she had donated to charity became, on her Schedule A, a $10,500 cash gift. She also deducted work expenses for which she had already been reimbursed.