Doug Feller: So we're challenging people to think about what something looks like 5, 10, 15, 20 years from now, and that's something that they probably haven't thought of.
Doug Houser: From Rea & Associates Studio, this is unsuitable, a management and financial services podcast for entrepreneurs, tenured business leaders, and others who are ready to look beyond the suit and tie culture for meaningful, measurable results. I'm Doug Houser.
It's not always easy to make sound financial decisions, in fact, the study of economic theory has undergone its share of adaptations over the years to account for this fact. Thanks to the work of great researchers like Richard Taylor we now have a greater understanding as to why we make the economic decisions we make, and it turns out that people just aren't rational. Today Doug Feller, a certified financial planner, and chartered financial analyst, and principal with Investment Partners, is going to touch on some of the lessons behavioral economics teaches us, and will explain three financial mistakes even the smartest among us make and what we can do to change. Welcome, Doug.
Doug Feller: Good to be with you, Doug.
Doug Houser: It's nice to have a fellow Doug for the first time on the podcast.
Doug Feller: Yeah, there aren't too many of us running around out there.
Doug Houser: No, I tell my -
Doug Feller: It's like Doug squared.
Doug Houser: Exactly. I mean, do you know anybody under the age of 20 named Doug? Seriously, think about it.
Doug Feller: I don't.
Doug Houser: It doesn't exist anymore.
Doug Feller: You know what it means in Scottish?
Doug Houser: Yes.
Doug Feller: River of blood.
Doug Houser: Yes, I know that. My parents reminded me that often when I was ...
Doug Feller: Well, let's not produce that here today.
Doug Houser: No, for sure. So talk to me a little bit about behavioral economics, and how we've seen this and learned from it, influencing personal financial decisions and that type of thing.
Doug Feller: Sure. Well in general, going all the way back, the economic theory that we use for portfolio management, for economics in general, was really born in the 1950s and 1960s. And it ties back to the psychology of the day back then, which was we had this fixed mindset. So all economic theory, all the models that were built, was built on the premise that A, we can all borrow at the risk-free rate, so credit score doesn't matter. And secondly, that we all make rational decisions with our finances. And if you do that, then these things should happen.
And what we have found out over time, and what is still a very young industry in financial planning, is that that doesn't happen. That's not reality. So behavioral economics is really the study of the mistakes that we make, both emotional as well as cognitive thinking errors. And so yeah, that's a brief history of what it's about and how to mitigate that.
And you mentioned Richard Taylor, a handful of others actually produced the Nobel prize. And so I often say as a financial planner that my work would be better served, I have a degree in economics, and I've often said that a degree in psychology would be probably as useful for what we do, because ultimately we're helping guide people to optimum financial decisions, and leading them in that, understanding as best we can the mistakes that they make, and getting them to the right choices.
Doug Houser: So if you sit down with an individual or a couple and you look for the definition from them, how do you pull that out of them in terms of their goals and trying to be clear about that? Because, to your point about psychology, people might not always be open and honest about what they really want. They'll say that maybe they think you want to hear or what they should say, right? So how do you draw that out?
Doug Feller: Well, through trust in the relationship. I mean it's really getting to know, and then part of the financial planning process is understanding what they actually need and then getting them into a conversation. So sitting down and getting them to articulate that. And I know the podcast is about the mistakes folks make, and I really think clearly articulating what their financial goals are is something that most people haven't spent a lot of time thinking about.
I have a friend, and their 25th anniversary is coming up in six years. They know they're going to Hawaii and they know where they're going to stay, and that's six years from now. But when I asked that same person a question, define for me what retirement looks like and when, how much it's going to cost, I get a blank stare. And then I get an answer from one of the spouses, and the other looks at them and says, "I had no idea that that's what you wanted to do." And so there's value as a planner in having that conversation, getting that articulated, just facilitating a discussion, and being particular. Retirement someday isn't a goal. As a planner, I can't help you get to someplace that you're not going. So getting that as specific as we can on paper, that's where the conversation begins.
Doug Houser: So you try to draw out of them some specific goal or goals that they want to achieve, or how they want to live, or whatever the case might be, where they want to live, what they want to do, those kinds of things. And then you try to work backward from there, is that sort of the idea?
Doug Feller: Yeah, we reverse engineer. Financial planning, let's keep in mind that its planning and humans have been doing that for the better part of 10,000 years or whatever the case is. So all it is is understanding where we're at today, current state, point A, call it. And that's pretty easy. And that's where the conversation for me as a planner usually starts. Somebody throws an investment statement on my desk, they throw an insurance policy there, they might hand me and say, "What do you think of my trust?" And my kind of tongue in cheek answer is I have no idea. They could be good or bad, I don't know, but without the context of what they need to do, all financial instruments, all legal documents, they're serving a purpose. That's the implementation.
So we need to understand point B, and that's a future state, where are we headed? I mean this is planning 101. And that's where I find, that's where I'm sending folks out of my office and they haven't really thought about that or articulated that. And it's difficult because financial planning is forward-looking, we're not looking in the rearview mirror, so we're challenging people to think about what something looks like 5,10, 15, 20 years from now. And that's something that they probably haven't thought of.
If they have, remember financial planning is just this holistic look at all areas of finance: investments, insurance, estate, tax, retirement, education. And while they may have thought through something, like, "I want to sell my business in five years, I need to engage Rea, and I need to begin planning for that." They execute that sale, and then all of a sudden they have this net worth that they've monetized. They never understood what that number was, and I ask them the question, "How do you want to intervene in the lives of your children, either today while you're living, or after the fact?", and I get a blank stare. So even though we may have thought through some of these things in certain areas, most people haven't seen it holistically, and how these areas all interact together.
Doug Houser: Do you find that maybe it's those so-called, maybe the human issues, are those soft issues that are the most difficult to navigate through for people? In other words, thinking about how they want to be involved with other family members, or support other family members, those kinds of things. Or for that matter, how do they want to treat their business, for example, once they go away. Are those the harder issues or is it really the financial part of it, the numbers in trying to get there?
Doug Feller: No, it's the qualitative soft issues that are more difficult. And again, coming back to human psychology, when you look at how we solve problems, we're dealing with ... the very first thing we want to solve is pain today. And so when we ask them to start thinking about good things, pleasure in the future, that's nebulous. And so as we guide them, point B, I also think another issue is sometimes it's very difficult to commit to point B because we don't have all the facts. And that's okay, but you can't steer a parked car. You have to put something on paper, I would encourage it to be written. We do this all through software, but if point B changes -
Doug Houser: Which it frequently does, right?
Doug Feller: Which it does, then that's really the work of the planner to come in. We help them get from point A to point B, but if it changes to point C, being able to attack and adjust towards that goal. But so many times I think it's such an overwhelming area, personal finances, and you can go to Google and find the answers to any question that I help answer. The problem is there's so much information, so to be able to distill the complexity and make effective decisions is very difficult if you don't know where you're going.
Doug Houser: So you talked about maybe a change in goals, that type of thing. So how do you hold somebody accountable to that over a period of time? In other words, they've defined a plan, you've helped them define a plan and goals, how do you hold them accountable? Is that difficult for people?
Doug Feller: It is, because of the nature of the relationship, it's a service, we're in the service business. So we are there to help, and ultimately it is their wealth that we're working with and they get the final call as to how does this happens. So the accountability aspect and then how to hold them accountable really comes through relationship, through consultation, and you have to do it effectively.
I know I look back, hard to believe it's been 11 years ago now, but 2008 and 2009 I found out how trusted those relationships were during that financial crisis. And I evaluated my success, and I think I was 97%, 98% successful in helping people, especially when it was difficult to stay on track. But there are some that, at that time, won't listen to your advice. And so, it sounds cliche to say relationship, but being able to lead people through those decisions when it's difficult, and have their trust, and, and I'll tell a potential client of mine, "We hope to build a good relationship with you, but if you evaluate this conversation and don't believe you can trust us, find somebody you will and make sure you take their advice when it's difficult."
Doug Houser: Sure. And I think part of that is the ability to be transparent too, and that you have to say, okay, I'm willing to put myself out there as a planner and be transparent with them, and not just tell them what they want to hear, but tell them really what needs to be said. Whether they take your advice or not, right?
Doug Feller: Sure. The accountability, I view financial planning as everybody has a potential ... call it wealth, it's not necessarily a net worth number, but there's potential in your income, your savings, everything that you do, the value of your business. And that's a number, whatever it happens to be, but there's a maximum potential. It's a line that grows over time. Einstein said compound interest is the greatest invention of humankind, and I started thinking about that and thought, you know what? There are these little mistakes that we make on our finances, even if we would have a clear goal. We sacrifice a 401k contribution for whatever reason, or we're not taking advantage of the match, or we decide we're going to take Social Security early because we don't like the political climate, and we don't think it's going to be there. But all of these little seemingly small mistakes, year in and year out, just like compounded interest, compound on themselves.
Doug Houser: They add up.
Doug Feller: They add up. And if you ever worked to try to quantify that, and sometimes we have, it amounts to hundreds of thousands of dollars, if not millions. And the mistake again, behavioral finance, we lied to ourselves, I think, and say, "You know what? I'm still living a good life." And yes, that is fine. But as a planner we want the outcome, we reverse engineer the plan in the system, and if we can prevent seemingly small mistakes through the advice that we give in a trusted relationship, and move them closer to that max potential line, that's the hard work.
That comes through conversation, it comes from interacting with your clients, understanding who they are, what the dynamics are. So we have a lot of fun conversations with our clients on what are seemingly soft issues but are critical to what we're doing.
Doug Houser: So that brings up a great point. So if you think about some of those behavioral issues that aren't aligning with the goals that you've agreed to, that's when you have some of those conversations, like, "Look, we need to adjust the plan here or rethink the behaviors," or something like that. Is that fair to say?
Doug Feller: Absolutely. There are hard conversations that you have to have sometimes. We're doing a disservice to our clients if we're not honest with them. What we can do is give them the information, guide them, advise them, and hopefully, they take that advice.
Doug Houser: Yeah. So one of the terms that I love is we get into ... I deal with a lot of business owners that are thinking about some type of transition or liquidity event, and the thing that I always remind them, because I've seen this happen so many times, is security and significance. They're so focused on security, the financial part of it, and, "Am I going to be okay or is my family going to be okay?", et cetera, they forget about the significance until it becomes too late. And then they think about, "What am I going to do?" So how do you holistically address that part of it when, when you're talking about planning? Do you talk to them about, "Hey, it's not only about the number here, but again, the behavior, and what are you going to do?" How do you address that? Because it's not an easy issue.
Doug Feller: No, it's not. It's a great question, I don't have a great answer for it. Again, it starts in conversation, starts in putting them into a forward-thinking mindset, we start talking about legacy. One of the things we certainly attempt to do, I think that helps facilitate this is to engage them in a family discussion. And you mentioned business owners, and I have them as clients, and the relationship with the next generation might not be so good. Maybe it is, but let's get into a conversation, now that you've monetized your business, and I mentioned it earlier, how this is going to interact with your children. Yes, you can sit on a pot of wealth, take it all away to the end and leave it to them. But are there things that you want to be able to communicate?
And so engaging the family in a discussion and putting their family in front of them, I think forces the conversation. They have to be able to articulate, not necessarily to me, but to their kids, maybe their grandkids, what it is they were about. Maybe that's work ethic, maybe it's a charitable intent, whatever the case is. And they have to articulate those things.
Doug Houser: And to make sure that everybody understands that and is on the same page. Because you see those miscommunications, somebody expects X, but really it's going to be Y.
Doug Feller: Yeah. Again, this comes down to clarity, and it's all about communication. Just be very clear about what it is you want. And just a personal example, my family, we started a charitable fund. And my kids are very young, but we have a written family value statement, we have a spending policy, we have decision making processes on Black Friday every year on what we're going to do. And my goal ultimately is, because our desires both current as well as legacy, like you're saying, is to get this into the hands of the grandchildren and be able to communicate that. So I've used it personally through interpersonal family dynamics, which is how I try to engage clients.
Now sometimes they don't want to have that conversation, because frankly the generation ahead of them didn't do a great job of communicating some of these things to the business owners that are selling today. Some of that carries forward today. So these things aren't easy. And I don't mean to be crass about it, but do the hard work if it matters to you.
Doug Houser: Exactly. Now one of the things that I see too, you talked about the struggle for certain folks to communicate or to really want to pass that information along. They'd rather kind of keep everybody in the dark a little bit. So how do you deal with that? Because I still have a lot of business owners that I know that are very close to the vest, and it's really tough to pull that information. How do you deal with that part of the process? Like, "Look, we've got to be transparent here."
Doug Feller: Yeah. Ultimately it's their choice. So if they don't want to, they don't have to. But we try to push it. Oftentimes you can rely on technique, the technical competency of what you do, in that you're going to have ... Let's just say you have an estate issue. Sometimes I think it helps to communicate with the family what you're doing and why the gift that might happen. So to be able to rely on technique in those cases can sometimes drive the conversation. We need to bring the family into the know so they understand what the picture is, but also maybe leaning on that big number. Do you, in fact, trust the next generation if something happens to you on the way home today? Let's imagine that scenario. And would you be comfortable with their handling of those things? Or maybe it's time to get them into a conversation.
Doug Houser: Yeah, absolutely. I think that's important. And I have a client I know that brought their son into the business, hoping to turn it over to them but realized within a couple of years that that individual wasn't the right person to run the company. They just, for a number of reasons, weren't the greatest fit. And to have that conversation he said was the most difficult thing in his life, but yet he wanted to elicit some response from his son, such that he knew he cared about him and wanted to make sure he was happily pursuing his own passion, not what the dad wanted for him. And he said once they got through that, said it was the best thing he ever did. So I think it's amazing what can come out of that if people truly are open and honest about it.
Doug Feller: Yeah, it's our job as advisors to push them into those conversations.
Doug Houser: Yeah. So getting back to the behaviors a little bit, and not being rational. How do you coach that in people? How do you try to move the needle such that people take you in as their trusted advisor, but it's beyond just simply the numbers, and here's the performance and that? How do you try to get into that behavior coaching?
Doug Feller: Well, and again, it starts with an honest conversation. And so when we put together a financial plan and we map it out, we're projecting as best we can, but we're relying on technique. And so we come up with probability analysis. So we will say something like, "Is your financial plan on track? And we're going to throw a bunch of variables at it, but the odds of it working out the way you want are X. Are you comfortable with that?? And when their behavior gets in the way of that, we can easily call them back in and say, "Well, let's do Y. Your investment portfolio is allocated in such a way that it is driving an 85% success rate, and you want to sell at the bottom of the market. Let me illustrate that for you." And we're able to show them and quantify, again as best we can using projections, how that affects their plan. And then they have a decision to make.
How do we coach that? If their emotions just aren't up to it then they have to adjust their goal downward. And that's part of the conversation.
Doug Houser: So I'm sure you've got all types of clients, so you get the ones that probably call you every day and question everything you do. Do you have some of those types, and how do you deal with that, that they get so into the weeds, as we'd say, with it? How do you deal with those?
Doug Feller: I actually have very few of those anymore. We focus on the big picture. There are all kinds of things in the short run that get a lot of attention, most notably in the media, there's no shortage of financial media, so we need to turn those things off. They're paid to sell news, not the truth. So we need to be very careful about what is getting filtered into our heads. And so again, that starts, we have a lot of conversations, you have to answer the question obviously, but ultimately showing them why that is insignificant.
And again, this comes back to clarity of goals. If we have a picture that's 20 years from now, how does what is happening in the marketplace today actually impact that? And the answer is, over a 20 year period it does not matter. What matters is behavior. And so that's why I talk about accountability to mistakes. Sometimes I think my job is just simply keeping somebody from making the biggest financial mistake of their life.
And again, there's a number on that. So yeah, that's how we do it.
Doug Houser: So optimally, if you're designing from your side the perfect client, how often should they sit down with you to talk about goals and objectives and plans? Is it once a year, what are your thoughts there?
Doug Feller: Obviously anytime anything changes, anything that's material that would impact the plan. And those life events don't happen frequently. If you do, you have DiMaggio's life, but we recommend twice a year. We like to check in face to face, a lot of times I'm gauging emotion, I'm gauging obviously if anything has changed, what are you thinking? And through our notes and our documentation, we can see the pattern, and see goals changing. So we're pretty clued into that.
Doug Houser: Yeah, that's good stuff. Well, I appreciate it. Any other tidbits or things that you can think of as we come up to year-end here? What should folks be prepping for 2020, beyond ... We don't want to get into the political climate, of course, that's unknown, but what should we be thinking about as we approach the new year?
Doug Feller: Sure. I would encourage anybody, I mention any kind of charitable giving and mistakes people make, and these are some of the technical aspects, but if you have any kind of significant charitable intent, don't be writing a check for it, especially if you have highly appreciated securities. We always see this after the fact when we review the tax return in the spring, and here we had a lot of capital gains that we could have given to the charity tax-free.
So as people are writing their checks heading into December here, give some thought to that. Make sure if you're taking your minimum distribution that you're using from your retirement account, and using your qualified charitable distribution provisions. So as we head into 2020 be giving that some thought.
Doug Houser: Yeah. Again, it's sit down and have the conversation and plan, right?
Doug Feller: Sure. And we're also in a very interesting time politically, economically, I don't mean to ignore that, but if that does give somebody pause, now is a good time to be addressing what those concerns are. And if your goal is, I keep mentioning goals that are 15,20 years down the road, if your goal is coming up in two or three years, it is important to be staying on top of these issues because yes, it is possible for them to have an effect in the short run. So if that hasn't been evaluated recently, now would be a good time to do it because there's obviously a lot of things in the news, a lot of things that are coming up that are affecting the economy that needs to be thought about.
Doug Houser: Absolutely. Well, that's sage advice. We really thank you Doug, and if you want to hear more business tips and insight, or to hear previous episodes of unsuitable, visit our podcast page at www.raecpa.com/podcast. Thanks for listening to this week's show. You can subscribe to unsuitable on iTunes, or wherever you like to get your podcasts, including YouTube. And while you're there, please leave us a review. I'm Doug Houser. Join us next week for another unsuitable interview from an industry professional.
Disclaimer: The views expressed on unsuitable and Rea radio are our own and do not necessarily reflect the views of Rea & Associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.
