Personal Financial Trainers

Why you should think of your Adviser as your Personal Financial Trainer

Picture this – a few years back, you found yourself in possession of one of those indoor exercise machines. You know the type – the kind people buy with grand aspirations of shedding kilos and sculpting a fit physique. The delivery arrived one day in a sizeable cardboard box, and you eagerly unwrapped it, marvelling at the promise it held. You sat on it, spun the wheels, but then it mostly became a decorative piece – an artwork to be admired rather than a tool for transformation.

In the midst of this, there was a stark contrast in your fitness journey compared to that of a good friend. He chose a different path, opting for regular sessions with a personal trainer. With each passing month, each spin class, you witnessed his remarkable transformation – a journey toward enhanced fitness.

Sure, a personal trainer is expected to possess extensive knowledge of the human muscular-skeletal system and exercise techniques. However, as you observed, it wasn’t merely technical acumen fuelling their collaboration. While technical skills were undoubtedly valuable, the story unfolded as something deeper – a journey beyond just knowing how to use an exercise machine.

The problem most of us have isn’t that exercise is too complicated, or the human body too difficult to understand. For most of us, the issue is the motivation to exercise consistently in order to achieve the desired results. In other words, the value of the personal trainer probably has more to do with the discipline of consistent exercise, than with the technical nature of how to correctly perform the exercise. And, for the friend who worked with the trainer, this discipline outweighed any other benefit, especially when compared to the stopping, starting, chopping and changing most of us go through when left to our own devices.

There is evidence of this value. In an academic article in the Journal of Sports Science & Medicine titled “The Effectiveness of Personal Training on Changing Attitudes Towards Physical Activity,” the author claims “one-on-one personal training is an effective method for changing attitudes and thereby increasing the amount of physical activity. Secondly, it seems that using problem-solving techniques is of value for successful behaviour change.” (1)

As with a personal trainer, it’s a financial adviser’s job to change their client’s “attitudes” and provide key “problem solving” techniques to improve their client’s financial health.

Ben Graham, who wrote one of the most referenced books on investments titled The Intelligent Investor, once quipped, “An investor’s chief problem – and even his worst enemy – is likely to be himself”.

Graham, who died in the 1970’s, would not have heard of behavioural finance. But he knew by experience what hundreds of academic articles have subsequently proven regarding poor investor behaviour.

In a 2011 paper titled “The Behaviour of Individual Investors” (2), Professors Brad Barber and Terrance Odean summarise two decades of work into the poor performance of individual investors.

Their five conclusions were, in general, individual investors:

1.    Underperform standard benchmarks (e.g. a low-cost index fund)

2.    Sell winning investments while holding losing investments (the ‘disposition effect’)

3.    Are heavily influenced by limited attention and past return performance in their purchase decisions

4.    Engage in naïve reinforcement learning by repeating past behaviours that coincided with pleasure, while avoiding past behaviours that generated pain

5.    Tend to hold undiversified share portfolios

They state, “these behaviours deleteriously affect the financial well-being of individual investors”.

Financial research company DALBAR, has also attempted to quantify the effects of poor behaviour on investors’ long-term returns. According to their 2016 study, the average individual investor underperformed the broad share markets by 2.89% over the past 20 years.

DALBAR made the following observation:

Investors lack the patience and long-term vision to stay invested in any one fund for much more than four years. Jumping into and out of investments every few years is not a prudent strategy because investors are simply unable to correctly time when to make such moves.

DALBAR noted nine behavioural reasons why investors have done so poorly, which an adviser must systematically try to correct.

The job of an adviser is to counteract each of these common biases which will otherwise undermine good, sound, long term investment decision making. And, as supported by the DALBAR (and other) research, this is often the greatest value an adviser can deliver.

As the saying goes, “We don’t have people with investment problems; we have investments with people problems”.

To change behaviour, an adviser must help each client define what they really want their money to achieve for them in life. The adviser must then substantially increase the probability their client is able to achieve those outcomes. The key is to help clients make smarter investment decisions and prioritise what matters to them the most. The best advice is honest and sometimes confronting, but it is decisive and adaptable to changes in markets and lifestyle.

It’s not that investing is difficult, it’s just difficult for most individuals to do it consistently well. Like exercise, it’s not about making a big effort every once in a while. Great advice is best to be implemented consistently and carefully over a long period of time.

Investors would do well to think of their financial adviser as their personal (financial) trainer.  Not just because an adviser is more likely to help us make better long-term investment decisions, but because he or she will keep us motivated and on track when we might otherwise succumb to poor behaviour.

After all, it’s a bit harder to say, “Exercise? I thought you said extra fries” when your personal trainer is on your team.

If you, or someone you know, would like to improve their financial fitness, call your favourite FoxPlan Financial Trainers on 0800 NO STRESS or click here to Learn more

1.      https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3937569/

2.      Barber, Brad M and Odean, Terrance, The Behavior of Individual Investors (September 7, 2011). Download a copy of the study here