Dan Ariely Dan Ariely.

Dan Ariely, groundbreaking behavioral economics researcher and Duke University professor, sees the future financial advisor modeled after one of his own FAs. He “cared about” him “holistically” and gave him critical advice about spending, Ariely tells ThinkAdvisor in an interview.

The expert on decision-making and author of “Predictably Irrational” and two other New York Times bestsellers expects advisors’ evolving role to focus on spending, saving and quality of life.

This will require them to earn a deeper level of trust to guide clients in making financial sacrifices now that will benefit them in the future, Ariely, professor of psychology and behavioral economics, says in the interview.

In his new book, the marketing expert gives advisors and others targeted advice. “Amazing Decisions: The Illustrated Guide to Improving Business Deals and Family Meals” (Hill and Wang -  July 23, 2019) tells how to make better decisions in both the “market world” — buying and selling — and the “social world” — mostly one’s network of family and friends.

For the first time, Ariely, chief behavioral economist of money app Qapital and chief behavioral officer of Lemonade Insurance Co., uses the entertaining graphic novel format — with illustrations by Matt R. Trower — to convey his ideas.

Market norms and social norms are principles that guide expected behavior. The former pivots on “self-interest and cost-benefit analysis”; the latter, on social interactions and relationships, Ariely writes.

In the interview, the professor, founding member and director of the Center for Advanced Hindsight, discusses why the usual motivator of paying people can backfire, as well as why folks make irrational decisions: We often don’t understand what’s driving us.

ThinkAdvisor recently interviewed Ariely, speaking by phone from his office in Durham, North Carolina. A founding partner of consulting firm BEwork, he noted that some situations benefit from being in a “money mind,” while others gain when the “social mind” is at work. But mix them together, and what do you get? A not-too-pretty result.

Here are excerpts from our conversation:

THINKADVISOR: How do you see the role of financial advisor evolving?

DAN ARIELY: At some point, the advisor will help us more in figuring out what to spend and what not to spend. There are, basically, two questions: One is how to optimize the money you’re saving — give it some constraint — and two, how much to put into savings and how much to consume now. The [big] question is to figure out how much to sacrifice in your life right now for the future. That’s very tough.

What does that require of the client-advisor relationship?

To be willing to sacrifice something about the quality of life now for later, you need to really trust the [advisor]. They need a very different permission to penetrate your life.

What do you see occurring specifically?

Imagine a world in which you don’t just give your financial advisor a sum of money and say, “Manage it,” but you call them to discuss life’s purchases. That’s a very, very important role; but it needs trust. If you fear that your advisor always wants to just sell, sell, sell, why would you call them?

Have you ever had an advisor that you considered outstanding?

I had an amazing financial advisor for a while who would spend a lot of time giving me advice about how not to get stuck trying [to pursue] a more expensive taste. He said that, as people acquire more money, the tendency is to start spending more, sometimes at a terrible pace. “Before you start spending more money,” he said, “let’s have a discussion about whether that’s a good thing to do.”

Did you listen to what he recommended?

I did, very much. I also knew I wasn’t in tremendous danger to spend [recklessly]. But here was a guy that cared about me holistically. He wanted to know about the money I had outside of his bucket and would discuss quality of life and what kinds of things gave me happiness and so on. It was great.

In your new book, you discuss intrinsic vs. extrinsic motivation. Many financial advisors rely to a great extent on extrinsic, or external, motivation, especially when it comes to selling. What can be the upshot?

It benefits them in the short term, for sure. But is it benefiting the firm and the advisors in the long term? That is, what’s the loyalty? What is the level of trust they’re creating? You want high trust because with the financial world becoming incredibly complex, you want to know that you can trust the [advisor] to have your best interest in mind.

What do you think about the SEC’s Regulation Best Interest, which says that financial advisors must act in “the best interest” of the client but which doesn’t define that term?  If a client believes their FA has the same fiduciary duty as an RIA, they might feel betrayed when they realize that isn’t so. You’ve said that, in general, “once customers feel betrayed, they’ll abandon ship.”

Very much. If someone you have a deep, trusting relationship with does something to violate that, it colors your whole experience. You think, “Where did I live for the last 10 years? Was I living in a lie?”

How does that situation play out, then?

You can’t look at them again with the same eyes, and you can’t ignore it. If, all of a sudden, I find that somebody I put a tremendous amount of trust in did something [detrimental] to me, I’ll never go back to them.

Let’s return to the notion of motivation: Can financial advisors learn to be motivated intrinsically?

I think they can. You could do an experiment: Start a new financial advisory firm with a group of people and pay them by the hour. Measure their motivation — not just how much money they make but how much they care about their customers and whose best interest they have in mind. [Thus], you could [see] if they’re just optimizing their own profit or maximizing the client’s profit.

It seems that people are conditioned to expect payment to motivate them. Is that good?

People expect it, and people think it’s the best motivator. But often it’s not. When you think about motivation, people’s initial reaction is almost always, “Let’s pay people to do that.” It turns out it’s not that simple.

Please explain.

It would be one thing if paying people were just ineffective; but sometimes it’s actually negative. The instinct of “Let’s pay people” can backfire in a very detrimental way.

Please discuss some ways financial advisors are paid and what those compensation systems mean to how they serve clients.

If we pay financial advisors by money under management, we get them to recommend less to clients to, say, pay off some of their mortgage. It’s a conflict of interest. If we pay them by commission, they’d be more interested in making more money and will do specific things. But are they going to take into account the whole client? Are they going to care about how much they worry? Are they going to talk to them about their lifestyle?

You did an experiment that showed that people worked harder for nothing than for something. Can that finding be extrapolated?

I don’t want to say that people would always work more for nothing: Of course, you can always pay a ton of money to get people to do things. But the moment we pay people, they think about [the job] in a very different way.

How so?

In part, when we pay people more, we distract them. So all of a sudden, they have less share of mind [focused on job at hand]. How much would you want to talk to your financial advisor if you knew that 20% of their mind was concerned with: “Am I going to make this sale or not?” You want them to be fully engaged and focus on your challenge. When we pay people, a lot of the time we can get them to act differently. But the question is: What are we doing to their overall motivation?

Where does irrationality come in with regard to motivation?

The motivations we have aren’t always rational. Rational motivation would mean: “I just care about money. I just care about my outcome.” But that’s not the case. The other part is that we don’t always understand exactly what’s driving us. What ends up changing our behavior and makes us behave one way vs. another isn’t what we think.

So what motivated you to write a graphic novel?

I wanted to explore a new adventure. I try to think about life as learning from experience, and this was a new type of writing for me. It was a lot of fun to discuss and think about graphically [with illustrator Matt R. Trower]. It’s a whole new world of association and links and ideas. It was a really wonderful learning experience.

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