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Nobel Winner Richard Thaler Can Help ‘Nudge’ Your Client’s 401(k) Decisions

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On Oct. 9, University of Chicago professor Richard Thaler won the 2017 Nobel Memorial Prize for Economic Sciences.

The popular field of behavioral finance is where Thaler has spent his career. One of his many contributions to economics has been the revelation that individual investors are human and that popular economic models have to take that into account.

Behavior finance observes and predicts how individuals behave and make decisions under real-life circumstances. Emotions, irrationality and biases influence every decision that a person makes.

This information is certainly not new to experienced investment advisors. The majority of time spent providing investment advice to clients is spent outside of the investment management discipline.

Older clients are often times the hardest to work with. Many still believe that the classic economic theories they learned in college can be applied to their investment management decisions. Pioneers like Thaler have helped me bring these fallacies to the attention of my individual company 401(k) retirement plan investment advice clients.

Think for a moment about all the choices that individuals in a company 401(k) retirement plan are ill-equipped to make during their careers. How much do I contribute, what do I buy, when do I sell, and how much income am I going to need in retirement?

Investment advisors are uniquely positioned to help their individual investor clients in all investment areas outside their company 401(k) retirement plan account. I would argue that, in this day and age, the investment advice relationship should include a client’s retirement plan account.

Most investment advisors wait their entire careers for the life-changing 401(k) plan rollover. That is Sears, Roebuck & Co. thinking in an Amazon world. Put a plan in place to advise your best clients on their company 401(k) retirement plan accounts while they are still working.

In 2008, Thaler co-authored the book “Nudge: Improving Decisions About Health, Wealth and Happiness” along with Harvard Law School Professor Cass Sunstein.

According to the book, a nudge is a choice “that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.”

Nudges make it easier to do the right thing. It also makes it harder to make another stupid, illogical, emotional, uninformed human investment management mistake.

Your best clients own expensive company 401(k) mutual fund options that continually lag the annual investment performance of their benchmarks. An investment advisor would not be caught with those same mutual funds in a client’s non-retirement plan accounts. Why are they tolerated in the same client’s 401(k)?

Worse, expensive and underperforming mutual fund choices have costs. Every individual company 401(k) retirement plan participant has “made money” over the last few years. How much more company 401(k) retirement plan money would they have now if their mutual fund choices were improved?

The analysis and answer to that question will form the basis of the expansion of your investment advisory relationship to include your best client’s company 401(k) retirement plan account management.

There is an investment advice niche opportunity for investment advisors to bring behavioral finance concepts that Richard Thaler developed to the attention of their best clients. What would happen if you used the concept of a nudge in regards to your best client’s company 401(k) retirement plan accounts?

How would this group react if you asked them for a copy of their default company 401(k) retirement plan menu of options along with their most recent quarterly statement? I will guarantee you that you will be surprised by the reaction when you ask.

Individual 401(k) plan participants don’t pay attention to their accounts. They don’t read current information on their mutual fund options. And they don’t have any rhyme or reason why they own the mutual funds they chose.

Worse, every few years their existing mutual fund choices are “mapped over” to completely new mutual fund options. Most individual company 401(k) retirement plan participants can’t name the current mutual funds they own.

Normal human beings don’t know how to make logical, disciplined and organized investment management decisions regarding their largest retirement asset, their 401(k) plan account. Fortunately, you can help.

Investment advisors need to remind their best clients of that fact. The headlines surrounding Thaler’s Nobel Prize announcement this week are a good time for that conversation.


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