Make sure they meet the 3 E’s

Select’s editorial team works independently to review financial products and write articles that we think our readers will find useful. We earn a commission from affiliate partners on many offers, but not all offers on Select are from affiliate partners.

While the rules of personal finance can be fairly straightforward, they’re not always easy to implement: Actions like saving for retirement or investing in the marketplace require certain behavioral changes that can be easier said than done.

Dr. Daniel Crosby, a psychologist and behavioral director at wealth technology and advisory solutions firm Orion, suggests that financial decisions in particular are best made with the help of another person. In this scenario, he says look for a financial advisor who provides support on three levels: education, environment, and encouragement.

Dr. Crosby’s reasoning is that people, specifically investors, sometimes need multiple layers of intervention to impact their behavior. “Finance is ‘simple but not easy,’ which can create a gap between knowing what we should be doing and what we’re actually doing,” he tells Select. As a result, it is the job of a counselor to educate, change the environment, and provide relational stimulation.

Subscribe to the Select Newsletter!

Our top picks in your inbox. Shopping recommendations that help improve your life, delivered weekly. Sign up here.

When hiring a financial advisor, look for someone who provides support on the 3 E’s

1. Education

More than what you know, education involves knowing what you don’t know, or what Dr. Crosby calls “meta-knowledge.”

“It’s not critical that you know how to fix your car, but it’s critical that you know when your car needs repair and when to seek outside help,” he says. That same theory can be applied to his finances. We may know the basics, but what is arguably more important is knowing when our finances need professional guidance.

As part of an investor’s education, for example, an advisor can also help them better manage expectations, whether they’re too optimistic or not optimistic enough. “It’s difficult to get an investor to behave appropriately when expectations of the investor are inconsistent with reality, so education can provide a useful ‘base case’ here,” explains Dr. Crosby.

Suppose you are stressed by market volatility. An advisor can help provide context showing that volatility and appropriate returns can coexist. This simple intervention helps prevent any fear-mongering and keeps an individual engaged during recessions, which experts generally suggest doing. While the market doesn’t always go up, it’s in an investor’s best interest to stay the course. Investing is a long game that you will most likely benefit from if you stick with it over time.

“Education tells us what to do, helps us understand what to expect from markets, and lets us know when to look outside for help,” says Dr. Crosby.

Looking for help outside? Those who have a brokerage account with a company like Charles Schwab or Fidelity may already have access to a financial planner. Robo-advisor Betterment also allows users the option to pay for one-time consultations with advisors, which cost a fee ranging from $299 to $399. Investors with a balance of $100,000 can upgrade to Betterment’s premium plan, which offers unlimited access. to real-life financial advisors for an annual fee of 0.40% of your fund balance.

2. Environment

Our behavior is largely based on the environment around us, which brings us to the next point of what to look for in a financial advisor. Dr. Crosby suggests that advisors can help with two environmental influences: the way we build our portfolios and the way we consume information, both of which impact our financial or investment behavior.

“Environmental factors are often more predictive of actual behavior than intention, which means we need to be careful about how we allocate our assets, as well as our ‘information diet,'” explains Dr. Crosby. “We have behavioral inclinations that are more or less consistent, but extreme conditions can cause us to act in ways that would surprise us.”

How we build our portfolios, or portfolio construction, is only as effective as how we react to the market. “In short, the mathematically optimal portfolio is only truly optimal to the extent that the customer can take the journey,” says Dr. Crosby. He goes on to add that some of the best performing funds of the recent past have had negative real returns for investors due to their tendency to enter and exit positions at precisely the wrong times.

The way we consume information, or information intake, includes the sources we turn to and how often. Constantly watching the markets, for example, is the number 1 investment mistake we hear from financial experts. The markets are constantly moving and being in an environment where you try to follow them in real time can negatively affect your behavior, leading you to continually check or change your investments when they are best left alone in the long run.

“The future is, on average, pretty average, and things that are newsworthy are, by definition, deviations from the average,” says Dr. Crosby. “By watching every tick of the market, reviewing portfolios too frequently, or tuning into melodramatic news sources, clients can create an environment that is not conducive to calm long-term thinking.”

3. Stimulus

All relationships in life should provide some type of encouragement, and the relationship you have with a financial advisor is no exception. “Encouragement from an advisor can have a positive, holistic impact, improving both performance and behavior by some estimates,” says Dr. Crosby.

Dr. Crosby points to research suggesting that those who work with counselors do significantly better than their “non-counselor” peers, even after accounting for a range of socioeconomic factors. According to the report he cites, those who had a long-term relationship, such as 15 years or more, with an advisor had 2.73 times the wealth of DIY investors. He notes that this is likely due to a combination of higher returns (study suggests 1.5% per year) and behavioral and decisional support. There is also evidence to suggest that working with a counselor has a positive impact on an individual’s overall quality of life, reflecting positively on a person’s happiness and marital communication.

Bottom line

Editorial note: Any opinions, analyses, reviews, or recommendations expressed in this article are solely those of Select’s editorial staff and have not been reviewed, approved, or otherwise endorsed by any third party.

Add Comment