How to make smarter financial decisions

The financial industry has traditionally relied on complex analyses and graphs to illustrate ideas. But if the response to the book The Behavior Gap is any indication, advisors and clients alike want straightforward explanations.

The publication is touted as a manual that’ll help you avoid simple financial mistakes. It includes more than 50 entertaining illustrations depicting common investor scenarios and mishaps—all drawn with a Sharpie.

The author is Carl Richards, CFP, New York Times blogger and director of investor education for Buckingham Asset Management Advisor Services. He says he “gets paid to help people make smart financial choices.”

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Richards started in the financial industry by accident. In 1995, he answered an ad for what he thought was a “security job” (as in security guard). Turns out, the posting was for a “securities” position at a Fidelity Investments call center. Needing the money, he took it.

By 1999, he had become an advisor and CFP at Merrill Lynch. Then, in 2004, he left Merrill Lynch to become an independent, and founded Prasada Capital Management.

Richards says he’s made all the mistakes clients and investors are warned against, and dealing with the consequences has made him better at his job. In a New York Times article, he details how he lost his Las Vegas home.

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He’s found simplicity resonates with clients.

“Many people think finance has to be complex, but sometimes we need to find fresh ways of looking at old concepts,” he says.

When clients would ask about such concepts, he would draw diagrams to explain them. They were wildly popular, and eventually landed on the desk of a New York Times editor. After Richards started a weekly column featuring his drawings, his artistic career took off—culminating in an eight-week exhibit at the prestigious Parsons The New School of Design in New York City.

“Elegantly simple”

He says his drawings are “conversation grenades that can start important discussions with clients [about their behaviours and decisions]. The drawings come from real experiences and concepts, and are elegantly simple.”

Richards then decided to publish The Behavior Gap based on his client experiences. And what is that gap? At a PWL Capital reception in Toronto last night, Richards demonstrated the concept with this sketch.

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If a client invested in a 10-year fund with an average return of 10%, for example, and held on to it, he would most likely get that 10% return, minus fees.

Most investors, however, “don’t behave that way. Clients [think they can] find the best return. They switch funds and asset classes, and rearrange their investments. By doing so, they pay more fees, get lower returns and dramatically underperform the average.”

Through his work, Richards hopes to close the gap between average returns and investor returns. Instead of succumbing to fear or greed, he urges clients and other advisors to first identify that those emotions often surround financial decisions. Then, simplify the process to reduce risks and mistakes.

Matching dreams to financial goals

Richards says most clients see money as a means to an end, rather than the end itself.

“Money is the embodiment of our goals, dreams and fears; its not just about spreadsheets and bank accounts,” he says. “Rather than finding products first and fitting them into a plan, clients have to base their plan on their specific goals from the start, and then choose suitable products. We’d never debate whether to take a plane, train or automobile before first knowing where we were going.”

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Many advisors think wealth management advice is their greatest asset. But, their first duty is to monitor and modify client behaviour, as well as their own. Do this by making sure clients’ financial decisions support their goals, teaching them how to hold on in volatile markets, and understanding their true risk tolerances.