– Editor’s note: This article is the first in a series by CLS Investments CEO Ryan Beach covering his firm’s research on advisor-client relationships.
Financial advisors work hard. Financial security and prosperity are two of the biggest stress factors that people face in their day-to-day lives. Finances can cause emotional, marital and psychological challenges that confound even the most successful individuals.
As people’s lives progress, they often get more complicated. Careers grow. Relationships form and develop. Children enter the picture. Children grow up. Marriages end, and begin anew. The number of variables one must take into account when managing his or her financial life, as well as advising on one, are practically limitless. Enter the advisor.
Financial advisors are to a person’s financial life what a physician is to a person’s physical life. The difference is that when a doctor advises you to stop smoking or face certain death, or that you need to cut back on the Five Guys burgers before your heart bursts out of your chest, there’s a very compelling reason to heed that advice – the grim reaper. The more stubborn patients may not heed the advice regardless, but they certainly have no room to argue with their physician. The financial advisor does not have this luxury.
Despite the criticality of personal finances for our lives and futures, research shows a pervasive financial illiteracy at even a basic level of knowledge for most people. Now, the same holds true with regard to medicine, but you don’t see people openly challenging their doctor’s assertions, thinking they could do a better job, or questioning their methodology at every turn.
The reality is that in finance, individual decisions about money and personal finances are often emotional and reactive, rather than rational or strategic. But surely, people who are of the mindset to seek out a financial advisor are more rational in financial decisions than the broader population, right? One would think so, but this line of thinking ignores the broader issue that human beings are not inherently rational, particularly when making personal decisions.
Human beings’ emotional connection to personal finances can lead to errors in cognition that are related to individual differences in motivation and personality, and ultimately result in less reliable decision-making strategies. This is the uphill battle that advisors face every day.