We all know that if a person makes bad financial life choices, their investment results are almost meaningless to the outcome of their financial lives. We now have research validating the fact that most people's financial lives really aren't influenced by their investing, and many advisers are focusing on all the wrong things.
THE FALLACY OF THE EFFICIENT FRONTIER
Our industry spends a fortune trying to build better, cheaper mousetraps to allow consumers to invest efficiently. Sadly, the impact is not important in the context of most people's lives. Why? Because the financial life arc of any person is not typically driven by their investment results (presuming they aren't investing in anything crazy), but rather by the financial life choices they face and how they make them. For investors and consumers, being on the efficient investment frontier is not as important as optimizing their life. How do we know? Because we asked. We conducted extensive research that asked folks about their financial lives and to identify the most memorable moments and lessons along the way. The graphs below show how people categorized their life's financial turning points (both highs and lows):
Source: United Capital and Riedel Research Associates
Truth is, when people reflect on their financial lives, saving and investing play a minimal role. The forks in the road — and the choices they make when they are at the crossroads — are what determines a life well lived or not (for the interactive report
click here). Decisions like sending kids to private school, buying a bigger house, taking a new job in a different city or starting a company are what really shape an individual's financial life. Beating a benchmark is irrelevant if people regret their big life choices.
(More: How to make better decisions for you and your clients)
WHAT'S OUR JOB?
Most advisers think their job is to help a person save as much as possible, invest well and build the biggest nest egg and legacy. So have these advisers earned their fees if their clients sacrificed so much for their future security that they never did the things they really cared about? Facts show that spending wisely — and that means helping people make big choices about how they live — is more important to individuals than how they save and invest. So how does the financial life manager of the future really earn their fees?
1. Understanding what people really want in their life and why they want it. One of the biggest impediments for advisers is the closed-end nature of the questions we ask. We all find out when people want to retire and how much they want to spend, and yet very few take the time to ask what their client's ideal life might look like, why they work and what they really want money to give them. The answer to these questions should drive everything afterward. Yet that is the “soft” territory many advisers feel uncomfortable treading. However, when a client needs to make a tough choice (and they will have to at some point), understanding their “why” is crucial to evaluating their alternatives. Purpose should be the compass of decision making.
2. Identifying blind spots and dark alleys. Experience is often overlooked as an asset, but it is why we are valuable. Helping people see the consequences of their choices, getting them to understand when their biases might be clouding their judgment and guiding them in how they make important tradeoffs is what individuals value most from an adviser in any profession. More than anything, people want a safe sounding board for the big financial decisions they are going to make.
3. Measuring how life is improved beyond investing. We all use investment benchmarks but what about life benchmarks? What we have learned from our research is that people want to know how you have improved their entire life and need to be reminded of it on an ongoing basis. That's why creating a way to measure and track their entire life beyond money and reinforcing that in regular client interactions is important to keeping clients happy for life (and recognizing your contribution).
(More: Vacation planning pays off for advisers)
WHAT ARE YOUR MEETINGS ABOUT?
Ultimately, there is one simple gauge of whether you are viewed primarily as an investment solution provider or someone integral to their financial life. Are your meetings focused on how the client lives or how they are investing? Are your clients speaking with you about whether their money is helping them live the life they want and what changes they should be considering? If you aren't helping your clients with their forks in the road, then who is?
Joe Duran is chief executive of United Capital. Follow him @DuranMoney.
