In order to persuade someone of something, there are two things you have to do right: you have to have the right message, and you have to deliver the message in a persuasive way such that the person on the receiving end of what you are saying inevitably thinks, “Why yes, you are like me, and people like us do end up doing things like that.”
I’ve been spending part of my day watching Youtube videos of financial managers and planners talk about the advice that they give prospective clients, and while I don’t want to single any of them out, I will share with you my general impression: even though a lot of them get the abstract advice right about avoiding fads and mentioning the inherent advantage of low-cost index funds, their method of delivering the message is terrible.
Why do I say that? Because they talk to the lay investor as if we are mentally incompetent and unable to understand the adult notion that decisions involve trade-offs. They say things like “retail investors only pick faddish stocks” and “individual investors panic sell as soon as their stock declines 10%” and they present this information in a tone that suggests they are the mature overseers with Buddha-like discipline while the rest of us are the great unwashed masses that somehow got our hands on $1,000 and can’t be trusted with it for another moment longer lest we buy some shiny object, and so we better hurry up and give it to them.
It would be much more refreshing if someone came along and said things like, “Low cost index funds are inherently hard to beat because indices like the S&P 500 consist of many of the superior businesses that you might select if you did your own investing, and the negligible fee amounts protect index investors from ever losing big due to one big, ill-timed bet.” Or “Typical large-cap American stocks tend to deliver returns in the 10% range. There is a catch, however, to receiving those 10% annual returns: about once every three years, you will see the total amount of money to your name decline, and about once per generation, it will decline by a significant amount and quite quickly. You get to decide if you find those terms acceptable.”
Even at the individual level, it would nice if there were some conversations had on the trade-offs between growth and income, something along the lines of: “Let’s say you have $10,000 available to invest. If you invest in AT&T or Royal Dutch Shell, you will get high current income that really does amount to something nice if you reinvest, but unless you get those stocks at a discount, the odds are unlikely that you will underperform the S&P 500. Likewise, if you choose to reinvest in Disney or Visa, there are very good chances you will beat the S&P 500 Index funds over the coming fifteen years, but that growth will manifest itself in a high net worth rather than high current dividend amount.” And then, after laying out both sides, the customer would decide which is more appropriate.
Who knows? Maybe these guys are more charming and personable when you visit them at their business offices than when they are speaking broadly to an interviewer about retail investing in general. But my impression is that the investment industry needs a lot more people who truly “get” their clients and can break down the complexity of investing into a series of questions yielding to different outcomes based on asking you about your personal preferences.
Instead, it seems that all financial managers just assume that every investor want to hear a clichéd bromide about how he will make them money in a “safe” way, without any particular conversation about the style in which the money gets made.
I do realize, of course, the inherent contradiction in what I just said: The kind of people who don’t want to think about the nuts and bolts of investing aren’t going to care about the process of creating wealth, and the kind of people who care about the process aren’t going to outsource all of their money to a third party.
But when people talk about “Main Street investors panic selling” or “always buying at the top”, my guess is that a lack of communication and proper empathy between the financial advisor and the client is a part of the process. Like I’ve mentioned before, if I were in the business, I’d make the client take a walk with me through Wal-Mart before deciding to sell.
Want to get rid of that Procter & Gamble stock because the price fell to $50? Okay, but first, you are going to have to walk with me through Wal-Mart and observe all the Procter & Gamble products sitting on the shelves. Then, you would have to go through a dividend reinvestment history through Procter & Gamble during the 2008 & 2009 financial crisis in which you see that those reinvested dividends created more wealth and higher income than when P&G’s share price came out of the recession. If that didn’t prove persuasive, well, you can only do so much.
I would be a lot more impressed with the financial industry if they didn’t assume their clients were stupid/emotional, and if someone is either stupid or emotional, they would take the time to explain why a client’s emotions might be getting the best of him without sounding patronizing.