How Dan Ariely Sees the Future of Financial Advice

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.