Just like a doctor who pops outside for a cigarette break, advisors sometimes develop bad habits in their own financial lives.
Although they do their utmost to hammer home the importance of proper planning, advisors don’t necessarily follow their own words of wisdom. They can fall victim to the same behavioral biases as their clients and end up making questionable financial decisions.
Overconfidence is one such cognitive bias that often affects advisors, says Stephen Wendel, head of behavioral science at Morningstar. He calls it the Lake Wobegon effect, named after the mythical town in the radio show “A Prairie Home Companion,” where “all the women are strong, all the men are good-looking and all children are above average.”
Part of the joke is that not everyone can be above average. But advisors can get caught up in the idea that since they’re experts, they are assured of not doing worse than those who aren’t experts. As a result, they can end up neglecting their own best interests.
“We might give advice to somebody else thinking they are average, but of course we’re not average, so that advice doesn’t apply to us,” he says.
Of course, this is true of people across many professions. The saying that doctors make the worst patients is a cliché for a reason.
Academics in the field agree. Advisors can also fall victim to status-quo bias, procrastinating or experiencing inertia “where we make all types of decisions, especially financial decisions,” says Victor Ricciardi, a finance professor at Goucher College. “The idea is that people don’t like change … and even advisors will not necessarily update their own estate planning.”
Although it’s impossible for someone to avoid all behavioral biases, Ricciardi suggests that planners need to understand these instincts better to help them in advising clients who are facing the same issues.
Confessing Financial Sins
To that end, some brave advisors were willing to fess up and admit their financial sins to Financial Planning.
The most commonly cited issues were failures to budget, a tendency to shy away from tough conversations with family members or knowingly taking on overly risky investments.
Some were even more basic — for instance, not updating important documents or not reviewing retirement plans for years.
Doug Boneparth of Bone Fide Wealth in New York City acknowledges he doesn’t always put money away for his own retirement, which is far in the future, and instead lets it build up in a reserve fund. He says he’s “on this kick of accumulating cash” in order to “feel better” about moving retirement savings down on his list of goals after he and his wife had a child and bought a home a few years ago.
Essentially, he says, he’s being even more conservative for himself than he would recommend for clients.
“Does that conflict with the advice that I give?” he asks. “Not necessarily, but it’s a challenge. Maybe I should be looking closer at that mix about how much goes into retirement versus cash reserves.”
Similarly, Ryan Marshall, a CFP who is a partner at ELA Financial Group in Wyckoff, New Jersey, concedes that he doesn’t review his retirement plans once a year as he does with his clients. Instead, he does such a review only “once every four or five years.”
Risk management is another area where there is a discrepancy between what advisors say and what they actually do.
Matthew Gaffey, senior wealth manager at Corbett Road Investment Management in McLean, Virginia, notes the traditional strategy of having retirees ramp down the risk in their portfolios, which he notes should be more akin to “pumping the brakes rather than slamming them.”
Whereas Gaffey might advise clients to progressively reduce risk in their portfolios over time, he’s more comfortable holding risk in his own investments. He noted that other advisors take that same approach.
On a lighter note, Marshall questions whether retirement will be in his future at all. “I don’t think I want to retire ever,” he says with a laugh. “I’m giving people advice to retire [but] I really like my job. Granted, I’m still young. I’m 36 years old, so I have a lot of time. But I truly enjoy my job.”
Here are some of the major shortcomings that these and other advisors acknowledge when they reflect on things that they’re saying to clients but not actually doing themselves:
As someone deeply immersed in the field of behavioral finance and financial planning, it's evident that the article sheds light on a pervasive issue among financial advisors—their susceptibility to behavioral biases. The observations and insights shared align with my extensive knowledge of these psychological factors that influence decision-making in the financial realm.
Stephen Wendel, the head of behavioral science at Morningstar, aptly points out the overconfidence bias, which he terms the "Lake Wobegon effect." This bias reflects the tendency of advisors to believe they are above average and, as experts, immune to the same pitfalls as their clients. The analogy to doctors making the worst patients emphasizes the universality of this phenomenon across professions.
Victor Ricciardi, a finance professor, adds depth to the discussion by highlighting the status-quo bias and inertia that affect advisors. This resonates with the broader understanding that individuals, even those with financial expertise, may resist change and neglect their own financial planning, succumbing to the very biases they caution clients against.
The article goes beyond theoretical discussions, offering real-world examples of financial advisors acknowledging their own financial shortcomings. Doug Boneparth's admission of not consistently saving for his retirement aligns with the concept of advisors neglecting their best interests, mirroring the challenges clients face. Ryan Marshall's less frequent review of his retirement plans further exemplifies the gap between advice given and personal financial actions.
The discrepancy in risk management strategies, as highlighted by Matthew Gaffey, adds another layer to the narrative. Gaffey's comfort with holding more risk in his investments than he might recommend to clients showcases the complexity of applying financial principles to one's own situation.
In essence, the article underscores the importance of self-awareness for financial advisors. Acknowledging and addressing these behavioral biases are crucial steps not only for personal financial well-being but also for enhancing the quality of advice provided to clients. It reinforces the idea that understanding and managing behavioral biases are integral components of effective financial planning and advisory practices.
