In today’s conversation, I’m speaking with Dr. Daniel Crosby, he’s a psychologist, behavioral finance expert and asset manager who applies his study of market psychology to everything from financial product design to asset allocation. He’s also been named one of the “12 Thinkers to Watch” by Monster.com, a “Financial Blogger You Should Be Reading” by AARP and was honored as one of the “Top 40 Under 40” by Investment News. Daniel is a New York Times and USA Today bestselling author, founder of Nocturne Capital, and his ideas have appeared in Huffington Post, Risk Management Magazine, Wealth Management and Investment News.

Today, we dive into his latest book “The Laws of Wealth: Psychology and the Secret to Investing Success.”  We discuss the 10 guiding principles that you can use to manage client behavior—including the essential ingredients your planning process needs to have in order to achieve the results that matter the most to your clients.

 

Here are a just a handful of the things that you’ll learn:
  • [06:08] What is “behavioral finance” and why it matters to financial advisors especially when dealing with how to best serve your clients.
  • [10:46] Why Daniel has hired his own financial advisor, even though he is obviously licensed and has the knowledge to do it himself.
  • [13:12] Daniel and I talk about the psychology behind the massive surge in Bitcoin prices and how to handle client questions on the currency itself.
  • [19:16] Why Daniel sees advisors more as behavioral coaches rather than asset managers—and the studies that show the direct benefits in greater returns for a portfolio.
  • [01:07:15] Daniel explains why he hopes there is no such thing as behavioral finance 25 years from now, definitely an interesting thing to say, coming from one of the foremost experts out there on Behavioral Finance.

SHOW NOTES:

  • [06:08] What is behavioral Finance?
  • [06:30] The most important truth every investor needs to understand, regardless of uncertainties in the market.
  • [10:46] Find out why Daniel pays a financial advisor—despite being one himself—to watch his back.
  • [13:12] Daniel shares his thoughts on Bitcoin and how to have these conversations with your clients—Remember, if you’re excited, it’s a bad idea!
  • [23:48] The psychology of willpower and how limited it really is.
  • [25:43] The big mistake a lot of advisors fall prey to when it comes to their own investing behavior and what you can do to better prepare.
  • [31:21] How to have those tough investment conversations with clients—Daniel shares his advice on beginning with why.  
  • [44:52] Why creating a plan isn’t enough—Find out how you can effectively communicate with your clients in a more meaningful way.
  • [48:01] Why you should leave the forecasting up to the weathermen!
  • [53:34] Diversification always equals frustration—and if it doesn’t, you’re not properly diversified!
  • [55:51] Risk is not a squiggly line—Discover the 2 types of rizk that are under discussed.
  • [59:09] Why you can be right and still be a moron!
  • [01:02:04] The first person Daniel thinks of when he hears the word successful and why?
  • [01:02:58] Daniel shares his favorite book he’s ever read and how it’s impacted his life.
  • [01:04:09] How did Daniel become a Behavioral finance expert?
  • [01:07:15] Find out why Daniel hopes there is no such thing as Behavioral Finance 25 years from now.
  • [01:08:40] The one piece of advice that’s lead to his success.

SELECTED LINKS FROM THE EPISODE

  • Connect with Daniel Crosby

Website | TwitterLinkedIn

PEOPLE MENTIONED IN THE EPISODE

REVIEW OF THE WEEK

Thanks for checking out the latest show, here’s this weeks featured review! This one comes to us from Certified Financial Planner Cam Hendricks who says:

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Thanks for the review Cam, I appreciate it! There are some amazing shows out there in our space, so to call my show the #1 option for financial advisors is an amazing compliment so THANK YOU, I’ll do my best to keep living up to those words! Also, as Cam took the time to connect with me out on Twitter, I want to give him a shout out as he just published his book Where Family & Finance Meet back in June, so go help a fellow financial advisor out and grab a copy of it, it’s available out on Amazon! By the way, I love connecting with all of our Blueprint listeners so if we haven’t yet, you can find me on Twitter @Brad_Johnson, make sure to let me know you found me from the podcast and please share any future guest ideas or your biggest takeaways or favorite episodes from the show so far!

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TRANSCRIPTS

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[INTRODUCTION]

 

Welcome to this episode of the Elite Advisor Blueprint Podcast with your host, Brad Johnson. Brad’s the VP of Advisor Development and Advisors Excel, the largest independent insurance brokerage company in the US. He’s also a regular contributor to Investment News, the Wall Street Journal, and other industry publications.

 

[00:00:23] Brad: Welcome to the Elite Advisor Blueprint, the podcast for world-class financial advisors. I’m Brad Johnson, VP of Advisor Development and Advisors Excel, and it’s my goal to distill the best ideas and advice from top thought leaders and apply it to the world of independent financial advising.

 

In today’s conversation, I’m speaking with Dr. Daniel Crosby. He’s a psychologist, a behavioral finance expert, and an asset manager who applies his study of market psychology to everything from financial product design to asset allocation. He’s also been named one of the 12 thinkers to watch by Monster.com, a financial blogger you should be reading by AARP, and was honored as one of the top 40 under 40 by Investment News. Daniel’s a New York Times and USA Today best-selling author, founder of Nocturne Capital, and his ideas have appeared in the Huffington Post, Risk Management Magazine, Wealth Management and in Investment News. Today we dive into his latest book, The Laws of Wealth: Psychology and the secret to investing success. We discuss the ten guiding principles that you can use to manage client behavior including the essential ingredient your planning process needs to have in order to achieve the results that matter the most to your clients.

 

Here are a few highlights of what we get into in this conversation. Right out of the gates, we cover what is behavioral finance and why it matters to financial advisors especially when dealing with how to best serve your clients. Then we dive into why Daniel has actually hired his own financial advisor even though he is obviously licensed and has the knowledge to do it for himself. I love this part of the conversation as it speaks to the power of frameworks, to help us all manage each of our own individual biases, and how knowing what your individual biases are is only half the battle. From there, it’s on the Bitcoin. I mean, what financial conversation can be had in late 2017 without mentioning the lead player when it comes to cryptocurrencies. Not only do we get into the psychology happening right now when it comes to the massive surge in its prices, but we also cover how to handle client questions on the currency itself.

 

[00:02:21] Brad: Disclaimer: Neither Daniel or myself offer investment advice here. This is more a conversation on how to have the conversation around the psychology driving cryptocurrency interest. Later on, we get into why Daniel sees advisors more as behavioral coaches rather than asset managers and the studies that support the true value of having a financial advisor and how they show the direct benefit in greater returns for a portfolio. Especially for those out there worried about fee compression, make sure you get your notepad ready as we reference a number of resources and studies to support the value you provide your clients. Lastly, make sure you stick around to the end as Daniel explains why he hopes there’s no such thing as behavioral finance 25 years from now. Definitely, an interesting thing to say coming from one of the foremost experts out there on behavioral finance.

 

Okay. Before we dive into the conversation, based on the response we received from Jim Sheils’ podcast a few weeks ago, when I offered to share a book that brought a lot of value to my life, The Family Board Meeting, I’m going to do the same with Daniel’s book, The Laws of Wealth, today. I recently finished giving it a read and I promise that it will help all of you have better conversations with your clients. So, here’s what to do next if you’d like your free copy. First, all that I ask is that you leave an honest review out on iTunes for our show. You can visit the link BradleyJohnson.com/iTunes to make it easy. Once you’ve left a review, just drop us an email via brad@bradleyjohnson.com with your iTunes username and a mailing address and we’ll drop you a copy in the mail as a thank you. That simple. Also, for those of you out there wanting additional show notes, books mentioned, people discussed, as well as we have a full transcript of the show, they can be found at BradleyJohnson.com/38. So that’s it. As always, thanks for listening and without further delay, my conversation with Dr. Daniel Crosby.

 

[INTERVIEW]

 

[00:04:18] Brad: Welcome to this episode of the Elite Advisor Blueprint Podcast. I am here today with Dr. Daniel Crosby. Welcome, Daniel.

 

[00:04:27] Daniel: Thanks so much for having me.

 

[00:04:29] Brad: And so, this is fun because you’re a psychologist. You’re also a behavioral finance expert. So, we’re going to get a good combo as far as what drives investing decisions here on the show today. So, as we start off, the fun thing about a podcast is you get to keep it a little more informal and it’s more conversational which is what I love about this, conversations with interesting people like yourself.

 

We experienced a first here today that I feel like we need to let the listeners know about. We had a little bit of delay. We actually have an event going on here at our home office at Advisors Excel and I go to hop into my normal podcast room and I was greeted with the information that there was an advisor getting a massage in the room today. So, I just want to say thank you, Daniel, because you rolled with the punches. We pulled a quick audible here, found a separate recording studio, and just goes to show there are always unknowns regardless of whether it’s investing or just real life in general. So, I appreciate your patience here.  

 

[00:05:27] Daniel: Yeah. No worries. It’s a funny story and I’m glad you told the people about it.

 

[00:05:32] Brad: I’m assuming that’s also a first for you. You haven’t run into that before, have you?

 

[00:05:35] Daniel: Yeah. Actually, I was going to get a massage while being interviewed by you for the podcast today but then I found out it was on video, so I thought better of it.

 

[00:05:44] Brad: There we go. All right. So, let’s get into the serious side of this conversation. I’m excited. Actually, I finished your book and I really loved how you made something that’s not always digestible when you talk about behavioral finance. It was just a really quick read. It was really interesting. You told a lot of stories all the way through. So, I wanted to just start at the front end of this conversation. What is behavioral finance? How would you define that?

 

[00:06:10] Daniel: To me, behavioral finance is finance that accounts for the messiness and imperfection of human behavior. So, I think that’s just the easiest way to state it. I mean other people have said it more eloquently and more formally but, for me, behavioral finance is just finance that accounts for the people that make up the financial institutions and the financial markets in which we’re participants.

 

[00:06:35] Brad: And how you really laid it out in The Laws of Wealth, you told some cool stories, but I love the fact you said, you kind of laid out these two rules that counteract each other, “You must invest in risk assets to survive but at the same time as humans, we’re psychologically ill-equipped to invest in risk assets.” So, the rest of the book you really lay out, it was really ten different laws and then you kind of unpack those a little bit. So, I thought at the front end, we’ll see where this conversation goes but I figured that would be a good premise. We maybe run through a few of those and in the real-world examples how financial advisors out there can utilize those with their clients that may be succumbing to some of these and how to help navigate that and in the end, get their clients what they most need which is a solid financial plan for life.

 

[00:07:20] Daniel: Yeah. Definitely. You know, that paradox you mentioned, I talk in the book about even someone who makes a nice salary and sets aside 10%, 15% a year, it’s just not going to get you there. But then we know the deeper I get into the research, the more I become convinced that God could not have designed a worse investor than you or I. So, it is this great paradox that we have to do it and we’re just not all that setup for it. So, it’s tricky.

 

[00:07:48] Brad: Yeah. So, let’s go here and I pulled a few things out that I thought worth mentioning. You had some research by Professor Thaler and this was towards the beginning of the book which you said, “The crowd gets it all wrong when deciding to enter and exit the market. They enter at the time of immediate pleasure and long-term pain (bull markets) and leave at the time of immediate pain and long-term pleasure (bear markets).” And then you shared a federal reserve study talking about fund flows from ‘84 to 2012 and essentially showed exactly what it is talking about. Everybody would pile in at the top of a bull market and basically cash out at the bottom of the bear. So, the wise advice of buying high and selling low.

 

And so, as we go into that first rule you have, you control what matters most. Can you just get into your rule number one that you lay out in the book and how that might apply to guarding against buying high and selling low?

 

[00:08:42] Daniel: You know, I was very intentional about that chapter, in specific, because I said, “The first thing that I want to do from the outset of this book is give people a feeling of empowerment,” because one of the things that I run into very consistently when I talk to people about markets and financial behavior is people, novice investors and seasoned investors alike feel sort of tossed to and fro in the waves of volatility and sort of subject to the vagaries of financial markets. And so, what I wanted to say from the outset is, yes, there’s lots of stuff that’s uncertain. We don’t know what Donald Trump is going to do. We don’t know what North Korea is going to do or what the Fed will do. That’s all true but that’s not the most important truth.

 

The most important truth that is in up markets, down markets, sideways markets, you control what matters most and some remarkable sort of boring, unsexy things like how much you choose to set aside whether you automate your investing process, whether you manage fees. Things like this are a better predictor of whether or not you reach your deeply held financial goals are then all of the macro uncertainty that we talked about. So, I wanted to put first things first and just empower everyday investors to know that come what may, the best predictor of what shakes out is still your own behavior.

 

[00:10:11] Brad: And let’s go ahead and hit on that. You quoted multiple studies. That’s what I like is you put a lot of data in there, but it wasn’t boring. So, you told some stories throughout so well done because that’s not an easy combo to pull off. So, you quoted a number of different studies as far as the behavior gap and essentially you showed that between 1.17% and 4.33% per year could be gained by actually having proper behavior as an investor. So, is there any more to that and maybe right now we just get into to your story. We were talking before we went live here, and I asked you if you have a financial advisor, you are a financial advisor and the funny thing is you have a financial advisor that’s not you. So, obviously, you put that controlling measure in place. You want to talk about that now and how that might impact the listeners out there?

 

[00:11:02] Daniel: Yeah. I mean it goes to my first and second rules. We’ll begin to dip our toes in that second rule which is you can’t do this alone which speaks to the need for sort of a financial coach or a financial advisor. So, my third book on behavioral finance will come out in 2018 so I’ve written three books on behavioral finance. I’m an advisor. I have an asset management firm and I choose not to run my own money just because I know I’m subject to all of the same inconsistencies and foibles and greed and fear as the next person. And understanding your limits and understanding the true drivers of returns are far more about investor behavior than generating outsized returns, you begin to see how important this is. And right before I came down here to do this podcast, I was actually having lunch with my wife, and I was telling her how intensely I was feeling some of the fear of missing out and some of the regret and things around Bitcoin and I’m like, “I can’t. Look, that’s a whole different rabbit hole.”

 

So, I don’t know if it will be good, bad, or indifferent, but the fact is you could write 100 books on this. You could read every book on the subject. I’ve read most of them and it just doesn’t help. I mean, the best predictor is not education. Education, this isn’t easy for me to say as a guy who went to a lot of school, but education is a really weak predictor of behavior. It’s a very weak predictor of behavior. People don’t eat Cinnabon because they think it’s good for them. They eat it because they’re stressed out and it’s been a long trip and you’re walking through the airport or whatever. And in the same way, we don’t typically make bad investment decisions because we think they’re great or we lack knowledge.

 

[00:13:03] Daniel: We make bad investment decisions because we’re emotional, we’re upset, we’re greedy, we’re fearful, whatever. So, yeah, that some of the best money that I spend is paying an advisor to watch my back because I’m no different than the next person and understanding how not special you are I think is the beginning of wisdom when it comes to being a behavioral investor.

 

[00:13:25] Brad: Was it the Newton story in the book? Was it the South Sea? Basically, you told a story in the book, same thing, Sir Isaac Newton, and his quote. Basically, he could predict the stars, but he couldn’t predict human behavior.

 

[00:13:37] Daniel: Yeah. He says, “I can calculate the movement of the stars but not the madness of men.”

 

[00:13:42] Brad: Yes. Thank you.

 

[00:13:44] Daniel: Yeah.

 

[00:13:44] Brad: So, since you brought up Bitcoin, now we just have to go down this rabbit hole because actually I had it as a question and same thing like I came from an IT background. I’m in finance now and always typically my friends make fun of me because I have the latest, greatest tech or iPhone or whatever. And, yeah, I own zero Bitcoin and I’ve got kind of these tendencies where I’m like, “Oh man, do I get in?” And now I’m just seeing like this massive spike. So, anyway, let’s talk about that. Because I was just having dinner at my house Saturday night. I had a few clients in and they’re starting to get a lot of questions from their clients as far as Bitcoin.

 

So, granted, when something in the financial world is this prevalent all over the news, all over the media, it’s going to enter conversations with obviously financial advisors. So, what would be some good coachings that you might have as far as how to navigate those conversations and educate their clients not knowing the future of what Bitcoin may or may not be?

 

[00:14:42] Daniel: Yeah. So, Bitcoin I think is an interesting stand-in for just the larger financial picture. I sent out a tweet the other day, I’ve read a bunch about Bitcoin, I’ve listened to a lot of podcast by people who are in the know, I’ve tried to educate myself because my first reaction frankly was, “This is stupid.” I mean, when I fist heard about it I was like, “Ah this is a bubble. This is ridiculous.” And then price action has a way of making you a believer. When it goes from 700 to 17,000, you sort of sit up and take notice but the more I’ve learned about it, the more I sort of believe in the underlying technology, but I remain totally in the dark about what the ultimate outcome will be. In the tweet I sent out the other day said, “I could make a case for Bitcoin zero or a case for Bitcoin, whatever, 100,000 but with equal fervor.”

 

And so, in the face of that kind of uncertainty, I think the only thing you can do is play the probabilities and diversify. It’s getting harder and harder I think as Bitcoin gets to $15,000, $20,000 for the average investor to say, “Hey, I’m going to take a 1%, 2%, 3% position in this much like I would another asset class.” But if people were going to get involved that sort of the way, I’d suggest they do it. I don’t know if you remember learning about Pascal’s Wager but I think about it a little bit like Pascal’s Wager where I said, “Look, I’ve decided to believe in God because if I don’t believe in God and there is a God, I’m in trouble. If there is no God and I believe in Him, well, then what’s the big deal?” I mean I think about it a little bit that way. Maybe you want to get a small exposure so that if it does go to $100,000, you’re not so upset.

 

[00:16:40] Daniel: But certainly, it has big problems. It’s very slow. Bitcoin can transact three to seven transactions per second whereas Visa does 65,000 transactions per second. So, I think there are some big problems with it, but I think there’s some big potential. So, I think in the face of that and other investment uncertainty, the best thing to do is try and understand whether you’re going to be more upset about missing a big game or preventing against a big loss, and then try and take a diversified tiny stance that lets you dip your toes in it and learn a bit more.

 

[00:17:15] Brad: Well, that goes to principle number four in your book. If you’re excited, it’s a bad idea.

 

[00:17:19] Daniel: No. Yeah, it does.

 

[00:17:21] Brad: And as I read that chapter, I was like, “Man, that’s Bitcoin right now.” And I think the key thing, I mean, our clients, our advisors are dealing with retirees and I heard you say 1%, 2%, maybe 3% and really viewing it almost like a startup investment where you would have a small, small exposure because it’s high-risk, high reward. And I think the issue is when people let the emotions take over, the next thing you know they’re liquidating half their portfolio and throwing in some unknown.

 

[00:17:49] Daniel: Yeah.

 

[00:17:50] Brad: Probably not smart.

 

[00:17:51] Daniel: Yeah. In that chapter, I point to most exciting forms of trading and I point the lens toward IPOs. The average IPO underperforms the S&P by 21% three years on and the reason is because it’s exciting and people pile in and then all the structural problems, lockups and other problems take place so that people end up losing money, but people keep doing it because they’re stories. They’re stories of people having great wealth. If you would just put $10,000 in Apple when Apple IPO’d is a great story or pick your stock. And Bitcoin for all of the Bitcoin’s meteoric rise, it’s also fallen 75%, 80% on five different occasions. So, there have been some real millionaires minted from Bitcoin but there have also been some people who have lost dramatic money and if you are excited, it’s probably a bad idea. I think it’s a good sound principle for most of us who don’t have millions to play the cryptocurrency market with.

 

[00:19:03] Brad: Yeah. Well, George Soros, “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” I think that’s a great quote you start that chapter with. He’s done fairly well in the stock market.

 

[00:19:15] Daniel: He’s done alright.

 

[00:19:17] Brad: So, let’s go. We skipped to one of your rules here. So, let’s go all the way back to number two. You cannot do this alone. You had and obviously being a podcast for financial advisors we might as well pat ourselves on the back here on this podcast. So, you quoted some statistics there. One of them was a Vanguard study, the Advisor Alpha study. They showed by financial advisors coaching behaviors of their clients. That was an additional 1.5% of performance annualized. Am I quoting that right?

 

[00:19:45] Daniel: Yeah. I quote a number of studies there. The general thrust of those studies is that people who receive financial advice outperformed those who don’t by about 3% a year. Vanguard got more granular with it and broke it down to sort of the sub-facets. It said, “Hey, some of this outperformance is due to good asset allocation, some of it’s down to good tax alpha.” They found that 1.5% that you mentioned was due to behavioral coaching. That was the biggest effect size. And so, of all the things that an advisor does to add that 2% to 3% per year, behavioral coaching handholding is the biggest one.

 

And I also quote some studies in the book that talks about how that is not understood by the average client. The average client thinks that they’re hiring sort of a mini Warren Buffett who’s going to pick great stocks for them and help them outperform. And there’s a huge delta, there’s a huge chasm between what we as an industry understand to be the benefits of financial advice and financial coaching and what the clients understand. So, I think we have a messaging, I think we have some work to do from a messaging standpoint to help people understand what we’re really all about.

 

[00:21:05] Brad: I think that is a solid point. That was actually what I wrote down out of that chapter. The best use of a financial advisor is a behavior coach versus that of an asset manager. And look at, I mean, I’m seeing hundreds of financial advisor presentations over the last decade. Almost all of them focus on numbers, charts, graphs versus here’s how we’re going to help you navigate a proper written plan to address the goals that you have in retirement. And I think our industry needs to be better there. I think that’s a solid point. And if we do better there I think, well, most advisers would acquire clients at a faster rate because that’s what they actually want to accomplish.

 

[00:21:43] Daniel: Yeah. No doubt. We are 100% as an industry to blame. I mean, the clients didn’t just dream that up. That got marketed to them. And so, I think that we need to own that, and I think we’re starting to so that’s good.

 

[00:21:57] Brad: Yeah. So, by the way, for those of you out there talking in financial services right now especially fee compression is a big topic. If you ever want to just find a chapter in a book that basically says, “Hey, here’s on average what we’re worth,” go get Daniel’s book and go grab that chapter, chapter number where we at here.

 

[00:22:18] Daniel: Two. Chapter 2.

 

[00:22:20] Brad: Number two, you cannot do this alone. A number of studies in there that talk about proper coaching and having a financial advisor actually more than pay off the fee that you may charge. Okay. So, let’s keep rolling here. Unfortunately, we won’t be able to get through the whole book, but I would just pick out some things and we can let the conversation go where it goes.

 

[00:22:36] Daniel: Yeah. People need to go buy it.

 

[00:22:38] Brad: Yeah. Go buy the book, the Laws of Wealth. Yeah. First shameless ask, right?

 

[00:22:43] Daniel: Right.

 

[00:22:44] Brad: Trouble is opportunity, chapter number three. I’ll throw this quote out there and then take this wherever you’d like to go. “Markets don’t usually perform the best one. They go from good to great. They show the best performance when things go from terrible to not quite as terrible as before.”

 

[00:22:58] Daniel: Right.

 

[00:22:58] Brad: I love that quote.

 

[00:23:00] Daniel: Yeah. So, I love this anecdote. I sat by a woman on the plane the other day and she’s one of those friendly people on airplanes which I’m not. She chatted me up and she’s very kind and started asking me about what I did for work and I told her, and she looked at me sort of incredulously and she says, “Wait. What? You went to eight years of college, so you could tell people to buy low and sell high?” And I think that that’s such a great story because everyone thinks it’s so easy and we think that we have some sort of internal barometer of what low and high are and we just don’t.

 

And the case that I try and make in that chapter because it’s a fairly obvious point, I think the takeaway from that chapter is I speak to the psychology of willpower and how limited it is. Research shows too that if we exercise willpower in one domain where we are less able to use it in another. So, if you’re having, you know, if you’re stressed out about your kids or something or you’re on a diet, you’re less likely to be able to control your financial behavior. So, the case that I try and make there in chapter three, that trouble is opportunity, is that you need to lock in systems and processes for taking advantage of the worst markets like you shared in that quote because the fact is you’re not going to recognize it for what it is when it comes around next time. I talked to people all the time who say, “Oh man, I missed it. I missed it in 2009 but next time I’ll know,” and I say to them respectfully, “No, you won’t.”

 

[00:24:49] Daniel: Because the next time we get another 2009, you’re just going to be just as freaked out and just as panicked as you were the last time and you’re going to do the same thing unless you automate the process of doing the right thing. And I share some funny stories in there about funny. It’s about infidelity. Talk about some different studies in there that show how whether we’re talking about keeping the marriage together or keeping the portfolio together, we tend to do the wrong thing at the wrong time unless we just lock in that good behavior.

 

[00:25:25] Brad: When I read this chapter, I really think this is great timing. By all accords, we’re in one of the longest bull market runs in the history of United States of America. Now granted, on the frontend we had a pretty rough run but the last handful of years going on close to a decade now, a very, very solid bull market run. I want to ask you this. Do you think financial advisors fall into the same behavioral finance where they altered their views at the tops and bottoms of markets as well? Because and we definitely get your typical investor does which is why they need a financial advisor and maybe add a little color commentary here before I let you dive in on this.

 

Advisors Excel obviously we have a wealth management platform or hitting close to 3 billion on that front. We also deal with a lot of fixed income assets, things like annuities for long-term income needs. And it’s very interesting as we’re trending towards the longer end of a bull market run, we’ve seen a lot of offices, really successful offices, they’re slowly starting a pendulum swinging more AUM. And what’s interesting, we’re around in ’08 and ’09, obviously massive years for annuities, more of the fear-based side of it with the market correcting. So, what I’d like to throw out there is have you seen the same behavioral finance issues creep into financial advisors themselves as far as their investment philosophy and how do you guard against that if you can speak to that?

 

[00:26:51] Daniel: Yeah. So, one of the studies that I quote, I’m going to miss the particulars of it, but one of the studies that I quote in the book speaks to fund managers and how fund managers tend to have their largest cash reserves when forward returns are most attractive and tend to be most levered when forward returns end up being the least attractive. So, there’s that evidence to show that fund managers, supposedly some of the most sophisticated financial minds out there, fall prey to the same behaviors. There’s research that shows that financial advisors all the benefits that we talked about in Chapter 2 that we provide to our clients, we don’t have access to these in our own financial lives and there’s a lot of evidence and a lot of research around that to show that, “Hey, financial advisors can give great advice from inside out but when it comes to thinking about what they do with their own money, they’re just as fallible and just as irrational as the next person.”

 

So, yes, I absolutely think we fall prey to these things and I think, frankly, some advisors don’t do a good enough job of sort of titrating and tweaking their client’s expectations about the future. Because I could say with near perfect certainty that the next eight years won’t look as good as the last eight years. I mean, it would be shocking if they did and it would sort of defy all of the laws of physics as they pertain to finance. And so, just that simple realization that during times like that, during times medium-term periods of time when returns are likely to be lower than they’ve been, we can do a lot of good by managing client expectations, helping them understand that their behavior is going to be that much more important, that they’re going to maybe need to save a little more, spend a little less.

 

[00:28:57] Daniel: But what we tend to do as a human family is project the here and now into the future indefinitely. And so, I think advisors are just as human and just as guilty of that as the next person to say, “What’s happened in the last six months is what will happen for the next forever,” and I think that that’s a big mistake. And I think what it takes to do differently is tools. I think what you need is tools for measuring what are expected for returns based on history. Where are we in terms of valuation based on history? So, some of my work has been around trying to quantify where we are from a valuation perspective, from a forward returns perspective and the answers to those questions today are quite high and not great respectively. So, I think we need to be honest with our clients about that and sort of prepare them for whatever comes.

 

[00:29:55] Brad: There was another quote out of your book and a lot of them are coming back to me now and maybe you remember who this was by. It’s slipping me but essentially it was after the great recession. What will investors learn? And the answer was, in the short-term a lot, in the medium term not quite as much, in the long-term almost nothing. I feel like it’s history repeating itself. I think that definitely hit home with me at the time period we’re in.

 

So, let’s go back because I think this is a really big one right now, dealing with financial advisors all around the country. Almost all of them managing assets, also doing fixed income. Here’s my two cents on why I think a lot of this also happens is when you acquire a new client, obviously you’re going to tell in your sort of sales process or appointment process, you’re going to let them know why your firm is better than why they’re currently at or your investment philosophy or whatever that may be. But I think also when it comes to the market right now if I’m dealing with the average retiree or the average investor out there, it’s very easy for me to not rock the boat.

 

So, if they’re in the market, odds are they’ve done incredibly well over the last handful of years and if my advice to them especially as I’m acquiring them as a client is, “You know what, it’s probably time to take a few chips off the table right now, especially if you’re close to retirement and you can’t take another 25% drop the next time the market corrects. It’s probably time to start moving some chips over to this side.” What’s some advice you have for maybe navigating that conversation with clients? Is it all based on the tools and the analytics and the planning software you’re using or is there some verbiage that you would share as you really navigate the conversations that need to be had although they might not be the most popular right now?

 

[00:31:37] Daniel: Yeah. So, as a general rule, I always tell advisors whenever I’m doing any sort of practice management speaking, I always tell advisors to begin with why because I think once you understand that person’s deeply held values what they’re saving for. Because make no mistake, saving and investing like we said at the outset, these run contrary to the very fiber of who we are. They’re very tough to do. And so, if someone is putting aside present pleasure for an unexpected future, an indeterminate future outcome, they’re only going to do that if they’re doing it for something bigger than themselves. So, figure that out, figure out what it is and then couch that conversation in terms of wanting to protect whatever that most important thing is for them. And I think that authenticity will serve you well.

 

And then the caveat is if you lose some along the way, I don’t mean this to sound as flipping as it likely will but like you didn’t want them to be your clients in the first place. I mean, if they’re going to be so impervious to straight talk and just want you to sort of promise them the world, you’re just basically saving yourself some headache down the line. So, do a deep dive on what matters to them, couch that conversation around tools and tactics in the context of that big why and then hope for the best and realize that if it doesn’t work out, it wasn’t meant to likely.

 

[00:33:17] Brad: You’re hitting a little bit on Chapter 6 there which, as a quick aside, you help me figure out why my son watches other kids open Pokémon packs on YouTube so thank you for that with the mirror neurons that you mentioned, basically, how that brings endorphins or whatever you mentioned there. So, you state there, “Focus on personal needs rather than focus versus external benchmarks.” So, here’s how my portfolio did versus the S&P 500. Rather, focus on here’s how I’m doing against those personal goals that I have such as saving this amount for retirement or things like that. So, what keys in a written plan? If I’m a financial advisor out there and I’m looking for the key things to have in my client deliverable or the plan that I’m delivering to a client, what things would you make sure you’re focusing on there that you’ve seen maybe you do it at your firm or maybe other advisors that do this really well? What are some things that are working in there?

 

[00:34:09] Daniel: Yeah. So, a quick aside on the Pokémon cards, a friend sent me something this morning that a six-year-old kid made $11 million this year doing toy unboxing videos. So, I talk in there in Chapter 6 about empathy and mirror neurons and how we can sort of put ourselves in the shoes of another person and how that’s a valuable skill for advisors. Well, you can also make $11 million opening Power Ranger toys. So, anyway, but getting back to the point, I don’t think there’s any right thing to talk about. I think you need to take a semi-structured approach to figuring out what matters to that person. That’s going to look a little different to each person and the more open-minded you can be about arriving at that own thing instead of going in with some preconceptions about what that looks like for you, I think the more powerful that’s going to be. But then like we talked about earlier, you’re right. We touched on it. You couched everything in terms of that thing, that thing that that person’s thing.

 

In the book I give the example of people who were shown a picture of their children before making a tough financial decision saves 200% more than those who are not, and these were among a group of very subsistence level of folks who are just barely scraping by. And so, if people who are financially strapped can save twice as much money than those who don’t by simply just sort of resetting and looking at a picture of their kids, I think that’s a powerful message. So, the key for a financial advisor though is to make it visceral because the news about Bitcoin or a panic or a crash or whatever is in your face every day. To use the psychobabble terms, it’s very salient. It’s very visceral and very salient.

 

[00:36:09] Daniel: It’s easy for you to imagine what it would be like to have bought Bitcoin at $0.08 and have it be worth, whatever, $18,000 today. So, we have to make these things powerful and palpable for our clients and we can’t just talk about them. We have to like get them engaged at a deeper level, get them telling a story, get them engaging beyond just sort of skimming the surface of where a lot of us like to live. And even asking those people to imagine what it’s going to be like.

 

I saw Merrill Lynch do a thing a few years back that was based on some research that showed that people who saw themselves aged, saved more money. And so, Merrill Lynch actually bought an app where you could go, get on your webcam and it would make you look old. And so, the reason that they did this is because it made it very visceral that one day this 40-year-old face of yours is going to be twice that age and that 80-year-old Daniel is going to have the same wants and needs as 38-year-old Daniel does. So, whatever you can do to make that real and make it powerful in their lives I think will make your job a lot easier.

 

[00:37:27] Brad: That is interesting there. I was just doing a coaching call last week and same thing, the first appointment which a lot of our advisors call a discovery session I think a lot of times when someone comes in for the first time if you really look at yourself, the advice I give to a lot of our clients is you’re almost like an FBI investigator. You’re trying to figure out what human need or what emotion brought them in because there was one. People don’t just load up and say, “Hey, honey, let’s go chat with a financial advisor. I’m bored.”

 

And a lot of times I think what you get on those opening questions are very surface-level responses like a do-it-yourself where I might come in and say, “Hey, Daniel. Yeah, I hear you do pretty well. You run a nice firm. I just thought I’d get a second opinion kind of see what you’re doing that’s different than what I am,” when in reality if you keep asking those questions and going deeper and deeper and deeper, it might be because they got to hand it to them back in ’08, ’09 and they’re starting to see, “We’re getting up there but I don’t want that to happen again,” and all the emotions of losing sleep at night or whatever those were back in ‘08, ‘09.

 

So, I think not only just on laying out the forward place facing plan but I think also as you’re really digging in and asking questions on the frontend, so you can learn how to better serve your clients, that’s solid advice. Because I think, from my experience, a lot of advisors stop at what I would call kind of surface level answers when trying to figure out exactly what the client wants, how can they best serve them. Have you seen that happen in some of the coaching or some of the advisors you’ve interacted with?

 

[00:38:54] Daniel: So, I can’t remember if it’s in The Laws of Wealth or this book that I have coming out next year, but I cite research where people have had the emotional processing centers of their brain is damaged and they can’t even make very simple decisions like which suit to wear or what flavor of ice cream to have for dinner or for dessert. I’m letting on a little bit about myself there. So, they can’t make very everyday decisions when the emotional processing centers of their brain are damaged, so I think you make a great point there that the decision to engage a financial advisor is an emotional decision 100% of the time. So, if you haven’t tapped that emotion on some level then you’re not doing your job and people aren’t going to give that to you without you working for it a little bit because we all exist and to sort of dance of superficiality. You go to the supermarket and the person says, “Hey, how are you?” and you go, “Fine. How are you?”

 

It’s just the sort of lame social quid pro quo of everyone going through emotions and no one figuring anything out. If you’re locked into that same dance with your clients, they’re going to leave you. You’re never going to get to that core need. You’re never going to be able to scratch that itch and then the first time things don’t go their way, they’re going to take off. We live in a time where people are just longing to be listened to. I mean there’s a lot that’s right in the world like I think crime’s headed down, pollution’s even getting better, all these things are headed in good direction except for human connection. This is a lonely time we live in and people who listen and connect with our clients on a real level will be enormously successful I think.

 

[00:40:52] Brad: I heard this was a long time, but you just made me think of this. I hadn’t thought about this for a long time. There was an interview with the ultra-successful financial advisor I probably listened to a decade ago. I don’t even remember where. They ask him what was his number one trait that made him successful and his answer was one word. It was curiosity. I mean you think about good listeners, they’re curious. They ask that follow-up question. What do you mean by that? And they always go deeper. So, yeah, I think that’s an incredible point that unfortunately, I see a lot of advisors just forget. While we’re on this, we might as well go down this rabbit hole, but I think sometimes we get numb working in financial services for the last decade and a lot of the advisors we work with. You get numb almost like you’re an emergency room doctor like the sight of blood doesn’t bother him anymore.

 

And I think a lot of times in financial services, these are people sharing their deepest, darkest secrets as far as their finances, stuff they probably haven’t even shared with their children before and you’re kind of sitting there you’re like, because you’ve seen this over and over, you’re desensitized and you’re kind of checking boxes and building plans where when you really step back and think like how you’re impacting the future of not only this person sitting across the table from you but generations of their family to come if you’d build a proper plan. I think sometimes you almost have to pinch yourself and realize how much impact you have as a financial advisor in people’s lives and takes stewardship for it. So, I’ll get off my soapbox now but it’s something I see sometimes us fall prey to in financial services if you don’t step back and realize how impactful your job is.

 

[00:42:25] Daniel: Yeah. I’m a clinical psychologist by education and part of the reason that I quit doing that is because I found that enormously impactful human happenings no longer had the power to move me like I kind of heard it all. People would come in with stuff that was a very big deal and it’s almost commonplace for you in the way that you just described. And so, people have such difficulty talking about money and if someone will come in and trust you, in many cases a perfect stranger, people would quicker talk about sex, religion, and politics almost I think than money. So, if someone will come in and speak with you about this thing, it’s a real badge of honor that something that you rightly point out should be treated with a lot of respect. And clients can feel that. I think if we approach it with that level of awe and reverence, I think that does a lot to endear those clients to us.

 

[00:43:27] Brad: Yeah. I’m glad we’re on the same page there.

 

[00:43:30] Daniel: We’re on the same soapbox, brother.

 

[00:43:32] Brad: Yeah. One other thing is we go back to the mirror neurons that you mentioned. There was a study here that I think once again it could be the Bitcoin conversation going on right now. It could be, as you stated earlier, mathematically it’s going to be really, really hard for the next eight years to be as good as the last eight years were but it was a study by SCI Investments just before the downturn of 2008 which was perfect timing for a study like this and correct me if I get any of this wrong but basically they said, someone that had a single investment type of portfolio almost like, “Hey, I picked kind of my thing that I’m into,” during the downturn 50% of them chose to fully liquidate that account, 10% made significant changes versus someone that had a goal-based investment philosophy somewhere like a plan working with a financial advisor to accomplish certain goals, 75% of those made zero changes, and 20% actually made slight changes which was just increase the size of the immediate needs goal but left the long-term fully invested.

 

[00:44:36] Daniel: Yeah.

 

[00:44:37] Brad: So, with that being said, one thing that, speaking of soapboxes, we get on sometimes in the show, we’ve really talked a lot and had a number of different guests on that have supported having a process versus selling products and having a written plan for your clients. Essentially what I’m hearing that study say is if you do the work, a little bit of extra work on the frontend of actually building a plan that accomplishes their goals, the next time the market corrects, you’re going to save yourself a ton of heartache as far as unhappy clients, unhappy client conversations, client retention, not having people stick around. Is there more to that point there other than just the study state that is pretty obvious?

 

[00:45:16] Daniel: And I love that SCI study. The only finer point that I would put on it is I’m going to mess the numbers up. I think they’re close. Natixis did a study a few years ago that found that 76% of financial advisors thought that their clients had sort of a financial plan. Now I don’t know what the other 24 were up to but 76% said, “Yeah. My clients have a financial plan,” but then when they went and asked the clients of those same advisors, “Do you have a formal plan?” almost 70% said no. And so, I think a lot of times what happens is we’re mistaking some sort of basic Monte Carlo simulation and risk tolerance questionnaire, whatever, sort of piecemeal approach we’re taking to a formal financial plan.

 

You have to remember two things. The first is you have to remember that this is Greek to most people and, again, like when you do this all day, you get it. It’s meaningful to you. To them, it’s not. And I’m constantly surprised, just being sort of immersed in the industry, I’m constantly surprised when I talk to people outside of the industry how little sort of basic knowledge they have about finance. I mean, they just don’t teach this stuff in school as the way that they should. And then the second thing is people are busy and you have to revisit this, and you have to tie all of your talks and all of your interventions back to these goals and back to this plan if it’s to remain dynamic and vibrant and relevant throughout that client’s life. So, having a plan is a great first step but I think most of us think we’re doing that but we’re still not communicating that back to the client in a way that gets through I think.

 

[00:47:07] Brad: Yeah. It goes back to we live and breathe this stuff. So, it’s all these acronyms and everything that gets tossed around. It’s second nature. I think a lot of times, as a financial advisor, if you just take yourself completely out of our industry and say you want to get on a weight loss program or workout program and you went in to see a financial trainer, would you prefer the financial trainer that says, “Here’s a list of 12 different random supplements and, oh, here’s like some random exercises on this website and oh, by the way, I’ll do a BMI analysis over here,” versus the guy that has a binder and says, “Here’s the three-step plan to follow.” And we all know which one we would pick but I think a lot of times in financial services like we completely forget this stuff. It’s like just what would you as a normal human being actually want? And so, I think that’s a solid point.

 

So, let’s go into forecasting is for weatherman. So, this is Chapter 7 of your book. “Those who have knowledge don’t predict. Those predict don’t have knowledge.” I love that quote as well. By the way, just as an aside here, your quote game was on point when you wrote this book. So, well done, Daniel.

 

[00:48:14] Daniel: Listen, if nothing else, read the quotes. Yeah. So, forecasting is for weatherman. Again, I’ll begin my remarks here by just copying to my own guilt here. When I see an article because the unfortunate reality is very reputable financial news sites often very disreputable sort of links down at the bottom. You’d be reading CNN or something and then at the bottom it’ll say, “This hedge fund manager called 2008. Hear what he has to say now,” and I always want to click on it because we want someone to take the uncertainty out of it.

 

One of the things that I talk about a lot is the brain accounts for about 2% to 3% of your body weight but it accounts for about 25% to 40% of your metabolic spend. So, all the calories you exert in any given day, your brain is very hungry and not very efficient. So, we’re always looking for ways to think less and sort of outsource decision-making to other people. And forecasting is the means by which we do that in a financial context.

 

I talked again I can’t remember if it’s this book or the next book, I talk about people who were watching Jim Cramer’s program. They hook him up to fMRI machines where they monitor their brain activity and their brains, the part of their brain associated with critical thinking and decision-making actually goes to sleep while they’re watching Mad Money and it’s pretty incredible to think that a guy could be yelling and screaming at the TV and like throwing plush toys and hitting buttons and that your brain could become calm. But such is our desire for certainty and such is our desire for someone else to do the thinking for us.

 

[00:50:13] Daniel: So, I think I quote a lot of statistics in there to show just how bad forecast have been and are, but I think a necessary prerequisite taking this on is to understand why we crave them so much because you can understand how bad they’ve been and still want to click on the stupid link when you see it and it’s because of the very specific psychological reasons that I just touched on.

 

[00:50:38] Brad: So, essentially, we’re hardwired to want to conserve energy, therefore, hear something that will give me an easy solution without having to think about it.

 

[00:50:46] Daniel: Yeah. When I bought my house, we moved back to Atlanta two years ago where there’s a million houses and Atlanta’s huge and we can’t figure out where to live and we’re driving through my now neighborhood and my realtor goes, “Dr. Crosby,” appealing to my vanity, “Dr. Crosby, this neighborhood is full of people who care about their children and want to send them to the finest schools.” And you’re like, “Well, geez, okay like sold,” because you want to be that person too. It’s the whole 9 out of 10 doctors thing. And so, we have to do some thinking for ourselves or we have to delegate it to a personal financial advisor who knows us well and not to some talking head on a TV who knows us not at all.

 

[00:51:41] Brad: Let’s dive into Chapter 9, diversification means always having to say you’re sorry.

 

[00:51:47] Daniel: Yeah. So, I’ll go back to a tweet that’s top of mind. I checked my retirement account this morning and it was up 0.15% so my globally diversified low-fee multi-asset class retirement was up 0.15% and then I switched to CNBC and Bitcoin futures were up, whatever, 25%. And so, it feels a little lame. It feels not great and the name of the chapter comes from this understanding that if you have a globally diversified multi-asset class portfolio, when you check that once a year, when you check in once a year and you look at that, something will always have done poorly like something should always be doing poorly in your portfolio or you’re not well diversified. If everything’s going up at the same time, you’re not doing it right. And so, that’s sort of the hard pill to have to swallow here is that diversifying necessarily means that something’s always going to be frustrating to you and if it’s not then you’re not properly diversified.

 

[00:53:08] Brad: Yeah. There are all kinds of studies that hit on that. One I can think of is basically Morningstar was just all over the news with basically the five-star morning funds versus the one-star morning funds and that fact that oftentimes the five-star as soon as they got named the five-star, they got a ton more assets that were dropped in because of the name brand recognition but then their performance suffered long-term compared to what it had been. So, I think it just goes back to one of your early chapters that your investment should be boring.

 

[00:53:38] Daniel: Yeah.

 

[00:53:39] Brad: Expand on that if you like.

 

[00:53:40] Daniel: Well, no. I think that diversification is sort of humility and practice. Diversification is how you say, “I have no idea what the heck is going to happen.” That’s how you express that opinion. And it’s a little comforting. I see these people on TV seeming very certain kind of shouting about their opinions and I’m like, “Look, the more I learn about this stuff, the less that I feel I know and the less certain I become.” And so, I think diversification is the lived embodiment of that uncertainty.

 

[00:54:20] Brad: Well, I think Warren Buffett’s probably a decent guy to model in. He was fairly certain when he made a bet at the bottom of the market in ‘08, ‘09 so basically what he picked a low-cost Vanguard index, the S&P versus every hedge fund manager in the world and was it a ten-year bet? I’m trying to remember the time period. I think it was a decade bet that basically, his low-cost index fund would outperform any hedge fund manager on the earth and he won it in a landslide. So, it just goes back to when you look at how the market works over time, it’s more a behavior thing than it is a stock picker or here’s the best thing out there that everybody should pile their money into now.

 

[00:55:00] Daniel: Yeah. So, we’ll segue seamlessly into Chapter 8 which is excess is never permanent and that’s what Buffett’s betting on. In that chapter, basically, the thrust of that chapter is, “The truest words in investing are, ‘This too shall pass.’” And so, Buffett knew, “Look, things look very ugly now. They’re likely to look less ugly 10 years from now.” So, I like that “this too shall pass” philosophy because it’s chastening in good times and it’s heartening in bad times. So, whatever you’re going through, it won’t be like that for long. It’s I think sort of a market truism and that’s what he was betting on there.

 

[00:55:43] Brad: Yeah. And you made me realize that I went from Chapter 7 to 9 and then back to 8. So, thanks for keeping me on track.

 

[00:55:49] Daniel: No. We’re fine.

 

[00:55:51] Brad: So, let’s finish with10, risk is not a squiggly line.

 

[00:55:54] Daniel: Yeah. So, this is just sort of me picking on academic notions of risk. If you look at academic notions of risk, we have volatility as a proxy for risk and here I talk about two types of risks that I think are under-discussed. One is fundamental risk. I’m a big value investor guy and just believe in looking at companies, looking at things like excessive leverage and bad management. And things like this I think are more predictive of risk than how much a stock fluctuates up and down relative to the benchmark.

 

But even more fundamentally than that, it’s going back to behavior. It’s kind of coming full circle. Look, the biggest risk to your portfolio is you. The call is coming from inside the house sort of thing as it were because you are the problem. You are the problem and so that chapter kind of comes full circle and talks about more fundamental and more behavioral notions of risks that get beyond the sort of simplistic academic notion.

 

I also touched on let me not pick on fixed income here because I own fixed income and I believe it has an important role, but I talk about the rolling 30-year periods, the average more or less the investment lifetime of someone saving for retirement. If you look at rolling 30-year periods, stocks have beaten bonds 100% of the time and the real returns are seven-ish percent per stocks and 1%-ish for bonds real and yet we conceive of bonds as being far less risky than stocks. And so, how is it that something that wins 100% of the time and wins quite handily is the risky bet?

 

[00:57:51] Daniel: So, in that Chapter 2 I talk about going back to that paradox we touched on early. You’ve got to compound that wealth like you’re not going to get to where you need to go by keeping it all in cash or even all in fixed income. So, we’ve got to have more behavioral and more fundamental understandings of risk if we want to get to where we’re going.

 

[00:58:16] Brad: And also, I mean, you talked about fixed income. It’s a lot about time horizon. So, if I’m going to start taking withdrawals out of the bank and I’ve got all of my money at risk and I’m a year before retirement, it’s probably time to look at allocation as well. And so, I think which goes back to just a written plan. It’s like that plan should evolve based on your needs which your needs evolve as you go from the working years to the retirement years.

 

And that’s why it just goes back to, I mean, a lot of what I’m taking from this conversation, Daniel, is if you’re a financial advisor out there and you’re not doing some serious work on asking the right questions to truly find the goals that your clients have and then putting some sort of a written plan in place that specifically addresses them and evolves over time, you’re going to keep losing clients because a lot of the biases that we’re talking about today are going to come back and haunt you.

 

So, let’s go, my buddy, Aaron Klein and I know you actually I believe spoke at Riskalyze’s last conference. Is that right?

 

[00:59:16] Daniel: I did. It was a blast. Congratulations to them. Killer first conference, yeah.

 

[00:59:22] Brad: Yeah. So, I knew you guys had crossed paths so anytime I know that, I’ll shoot out a text or something and see if there’s some question I need to ask you that only they would know, right? And, Aaron came back, and he said, “Whatever you do, make sure when Daniel’s on, ask him about the Dodgers GM/hit on blackjack story.” So, we’ll kind of wrap up the conversation there before we get into some more philosophical questions.

 

[00:59:45] Daniel: Yeah. Thank you. Thank you, Aaron. So, this is again a story from The Laws of Wealth. It’s Paul DePodesta, former Dodgers front office guy like Aaron said. He tells the story of being out with a friend who was drunk, a little tipsy and they’re playing blackjack and his friend is showing 19 and he asked to hit. He wants to hit on 19 and so Paul DePodesta’s there and he’s like, “Hey, whoa, whoa. You can’t hit on 19, man. You’re drunk. I’m not going to let you do this.” And his buddy says, “No, no, he waives him off.” So, the dealer turns over what? A two, of course, and so the buddy’s got blackjack. He’s jumping up and down. He’s pointing his finger at DePodesta and he says, “I told you. I knew it. I told you I was right.” And that’s where he comes in with this mind that is sort of the cornerstone of my investment approach which is you can be right and still be a moron.

 

So, he says his buddy was right but he’s still a moron because good investing is not all about outcomes. It’s really more about understanding that a good process beats outcomes. And so, for me, as sort of a fundamental value guy, this is why I don’t own Bitcoin to bring it back. And I don’t know what the outcomes will be like undoubtedly some people will get very, very rich off of Bitcoin and it may prove to be enormously impactful. But it’s outside of my circle of competence and so I don’t touch it because I won’t always be right, but I never want to be a moron. And I want to manage that process and sort of try and tilt probability in my favor at every turn. That’s the way that I think about these things.

 

[01:01:48] Brad: My new rules. Don’t always want to be right but I don’t want to be a moron.

 

[01:01:52] Daniel: That’s right.

 

[01:01:53] Brad: It’s all the advice to live by.

 

[01:01:55] Daniel: Best words to live by.

 

[01:01:56] Brad: Perfect, Daniel. So, are you good? You have a minute or two to answer a few more questions here?

 

[01:02:02] Daniel: For sure.

 

[01:02:03] Brad: All right. When you hear the word successful, who’s the first person you think of and why?

 

[01:02:08] Daniel: I think of my dad actually. I think of my dad because he’s had a wonderful business career and he has not paid the same price for it in terms of family time and relationships that I think a lot of other people have. He’s an example to me of having it all. He’s someone who’s maintained strong relationships with family, friends, and people close to him and has still had a great deal of professional success. And that’s a hard line to walk and he’s walked it well. And so, to me, that’s sort of the epitome of real success.

 

[01:02:48] Brad: Solid. Yeah. A lot of times you see monetary success with people that don’t know who their kids and family are so that’s…

 

[01:02:55] Daniel: That’s what I’m trying to avoid. Yeah.

 

[01:02:57] Brad: Yeah. You’ve obviously written a few books, but I would love to hear what’s your favorite book that you’ve read and how did it impact your life.

 

[01:03:05] Daniel: The favorite book I’ve ever read is Man’s Search for Meaning by Viktor Frankl. I was trained as what’s called an existential psychotherapist. That’s a school of thought that he invented. I was given an award by his family for some research that I did into applying his work into sort of parts of the world where they haven’t been applied before and I think that reading Man’s Search for Meaning should just be sort of required for participation in the human family like you don’t even get to be part of the human family until you read and internalize that book because it talks about the power of purpose, the power of finding that why, making it central in your life, and just the cascading good things that come from having that sort of focus.

 

[01:03:58] Brad: Yeah. And for those unfamiliar with it, it’s a guy that survived the concentration camp and basically what his mental thought process was to keep going on to the next day. It’s yeah, an incredible read. Actually, now that I’m like why did I not ask this question? Because I’m not sure and I’d love to know. So, you started out as a psychologist. Where in your life did this flip to where you segued into behavioral finance and obviously got more involved in our industry? What took you down that path?

 

[01:04:26] Daniel: Yeah. Where did it all go wrong in other words, right? So, yeah, my mom asked me recently, she’s like, “Do you ever think you’ll be the kind of doctor that helps people again?” Thanks, mom. So, quick overview. I got out of school with sort of wearing out of doing clinical work already even just sort of on the tail end of my doctoral program, was looking at both teaching positions and sort of business applications of psychology. I got offered a job, a teaching position at a University in Alabama which will remain unnamed, but the offer was $38,000 a year and I just did the math and was like, “This can’t be my life.” And so, I said, “You know what, I’m going to look for business applications of this, work for a consulting firm initially that did pre-employment vetting of bankers.”

 

And so, before a banker would get called to the C-suite sort of thing, I would be called in to give him or her IQ test, personality test like a half day interview to see how they fit with the organization and it was in that bank that I became introduced to behavioral economics and behavioral finance and sort of the rest is history. So, that was about eight years ago that I quit working for them and went on my own. And so, it’s been great. I mean it’s been fantastic, but it took a very sort of specific and serendipitous turn of events for me to land here and I’m glad I don’t make $38,000.

 

[01:06:14] Brad: I guarantee at this point in your career you’re using just as much psychology in this business because just being in financial services I really feel like everybody that’s a financial advisor should’ve gone into some sort of behavioral coaching in a prior life to prepare them for the conversations you have here.

 

[01:06:31] Daniel: Yeah. Well, and the neat thing for me is the market is such sort of a fascinating canvas on which to paint with a psychological brush. I mean, it gives you real-time sentiment measures like all the time every day in a way that’s much more concrete than say working with individuals in a therapy setting. And so, that’s important work. I’m grateful for people that do it. I’m grateful that the people I went to school with are doing a lot of good in the world but I’m also grateful that no one dies from me not having a good day at work, so I sleep better because of that.

 

[01:07:12] Brad: Yeah. Okay. What is something you would like to see as absurd 25 years from now?

 

[01:07:20] Daniel: Something I would like to see as absurd? So, I’m going to say I hope that the field of behavioral finance is viewed as absurd 25 years from now. I hope that the idea that incorporating and thinking about human nature and thinking about finance in the context of human nature is so well integrated into just capital F finance at that time that the behavioral vestiges have just fallen off. I hope that there’s no such thing as behavioral finance in 25 years. They’re just finance which understands that of course human beings are a big part of that and discussions of behavior are well integrated into mainstream finance instead of these sorts of two silly camps of efficient versus inefficient folks and traditional folks versus behavioral folks. I think it’s a silly distinction and when you talk, when the two camps sit down and talk much, you see there’s not a lot of daylight I think a lot of the times between those two positions. So, I hope that distinction goes away altogether.

 

[01:08:29] Brad: Yeah. It makes sense. I mean, all of the statistics you quote in your book say that it should have been incorporated into finance long ago.

 

[01:08:37] Daniel: Yeah.

 

[01:08:38] Brad: The quicker we can speed that up, the better. Okay. Last question. What is the one piece of advice you can share with the audience that’s led to your success to this point?

 

[01:08:47] Daniel: You know, I’m going to go back to your curiosity thing. I think I have thought expansively about what I could do. I have thought expansively about what it means to be a student and a teacher of human behavior and for me, that’s been such rewarding work because that enters into every facet of life and business and family. And so, taking an expensive big picture view has what has served me so well and I think that that’s something we should all do a little more of, to think creatively about how the skill sets, the building blocks that we have can be formed into something new and creative that no one’s ever done before.

 

[01:09:31] Brad: Awesome. Well, Daniel, I just want to say thank you. I know the beginning of this conversation there were a few curveballs that got thrown at us, but I appreciate your patience and it’s been an incredible conversation so thanks for sharing that with me today and with our audience.

 

[01:09:44] Daniel: No. It’s been my pleasure and I hope the guy that got the massage is just feeling real relaxed right now.

 

[01:09:50] Brad: I think it was a win-win, man. All right. Until next time.

 

[01:09:54] Daniel: Yep. Take care.

 

[CLOSING]

 

[01:09:59] Brad: Thanks for checking out the latest show. Here’s this week’s featured review. This one comes to us from certified financial planner, Cam Hendricks, who says, “Number one podcast for financial advisors. Been listening since the beginning and really enjoyed the wide variety of topics from building Facebook communities, writing books for our niche, and creating an overall better experience for our clients. This podcast truly makes a well-rounded elite financial advisor.” Thanks for their review, Cam. I appreciate it. There are some great shows out there in our space so to call my show the number one option for financial advisors is an amazing compliment so thank you. I’ll do my very best to keep living up to those words. Also, as Cam took the time to connect with me out on Twitter, I want to give him a shout out as he just published his book, Where Family and Finance Meet, back in June. So, go help a fellow financial advisor out and go grab a copy of it. I believe it’s available out on Amazon.

 

By the way, I love connecting with all of our Blueprint listeners so if we haven’t already, you can find me out on twitter. It’s @Brad_Johnson. Make sure to let me know you found me from the podcast and please share any future guest ideas or your biggest takeaways or favorite episodes from the show so far. One last thing before you go. As a special thank you for checking out this episode, if you haven’t already, simply leave an honest review for our show out on iTunes and email me at brad@bradleyjohnson.com with your iTunes username and best mailing address and I’ll drop you a copy of Daniel’s latest book, The Laws of Wealth, in the mail as a thank you. So, that’s all for this week. Thanks for listening and I will catch you on the next show.


[END]

The information and opinions contained herein are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Advisors Excel. The guest speaker is not affiliated with or sponsored by Advisors Excel. For financial professional use only. Not to be used with the general public or in a sale situation.

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AE12174219 For financial professional use only