Choosing an advisor with the care you choose a good doctor will increase the odds of achieving your financial and life goals.
[This article was co-authored by Andrew Berkin.]
At a recent National Association of Professional Financial Advisors (NAPFA) conference in Salt Lake City, finance professor Meir Statman told advisors that, to do their jobs well, they need to think of themselves as “financial physicians.” This role requires advisors to pay attention both to the wealth objectives and the overall financial well-being of their clients.
Statman, who teaches at Santa Clara University’s Leavey School of Business, focuses on behavioral finance research. His goal is to understand how investors and managers make financial decisions, and how these decisions are reflected in financial markets.
At the conference, Statman counseled advisors to provide their clients not only with a financial education and a prescription for the right investments, but also to treat the human emotions and tendencies that lead to behavioral mistakes.
Behavioral mistakes, such as overconfidence and confusing “familiar” with “safe,” can lead investors down the wrong financial path. Statman recommended that advisors teach investors “the science of investment markets, but also the science of human behavior.”
His comparison between the medical profession and financial advice is a good one for many reasons. For example, when you visit a physician for the first time, you’re required to fill out many pages of medical forms so that the doctor has all the information necessary to make the proper recommendations.
The same thing should be true of an advisor. Before giving any advice, the advisor should carry out a thorough process of “discovery” to determine everything that is important to you about money.
To develop the right financial plan, the advisor needs to learn not only your financial goals, but also your life goals. So, like a good doctor, I believe your financial advisor should do the following.
Be An Educator
Doctors know that the best patients are the ones educated about their conditions and treatment plans. Similarly, the best investors are the ones who understand why they have adopted a strategy, or investment plan, and why they have chosen specific investment vehicles.
That’s why Statman urged advisors to be educators. It’s obviously also good advice for investors. Education is the armor that can protect you from both bad advice and your own mistakes.