CFA Conference: Carl Richards

CFAThe Behavior Gap

Moderated by Margaret E. Franklin, CFA, Marret Private Wealth Inc.

Carl Richards (@behaviorgap) is director of investor education at The BAM ALLIANCE, a community of more than 130 independent wealth management firms throughout the United States. He is a weekly contributor to The New York Times and is a columnist for Morningstar Advisor. Carl has been featured on the programs Marketplace Money and the Leonard Lopate Show and on the websites and Additionally, he is a frequent speaker at financial planning conferences and visual learning events. Carl is the author of The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money. He is a Certified Financial Planner (CFP), and he holds a BS degree in finance from the University of Utah.

Carl’s central recurring theme is that when emotion gets in the way of making smart financial decisions, the distance between what we should do and what we actually do is the “behavior gap.” Using simple drawings to explain this gap, Carl’s method is to offer insights into your approach to investing and how to recognize and avoid common, emotionally driven investment mistakes.

My session notes follow. As always, these are contemporaneous notes. I make no guaranty as to their accuracy or completeness.

How to Change the World

  • Our industry now is in the midst of massive change – we have a massive opportunity.
  • Carl entered the industry in the summer of 1995 (when Netscape went public).
  • He thought he was applying for a “security” job rather than a “securities” job, but still got hired.
  • What’s your job? At Merrill, Carl was told to find alpha (above average investments)
  • No matter how hard he tried, whenever he found what he thought was an above average investment (and his or his clients’ capital was committed), it became a less-than-average investment.
  • On average, the average investor underperforms the average investment – because of the “behavior gap.”
  • If we hold average investments but our behavior is better, we will outperform by a lot.
  • Started to sketch –
  • In general, we tend to buy high and sell low (repeat until broke).
  • In 1/00, in a peaking market, $46B put into equities; $54B in 2/00 and $39B in 3/00 (previous high $29B); then markets began their quick descent.
  • At the bottom (10/02), net outflows from equities reached their highs.
  • We need to figure out a way to close this behavior gap.
  • Also, people are looking for “simpler.”
  • In 2009, the NYT asked him to answer a question (450 words) with a sketch.
  • His first piece focused on investing and entertainment being a bad mix.
  • Scathing comments ensued.
  • What can we do about it as an industry?

    1. Admit that we’re part of the problem. We focus on time-weighted rather than dollar-weighted returns. We sell what people want rather than what they need. We’re opaque about fees. We make a decision and then look for evidence to support it.

    2. Start talking about money (not investing and finance). Money is a means of accomplishing our dreams and goals. But we don’t talk about it and don’t know how to talk about it. Talking about money is highly emotional and readily turns into a fight. We’re scared of it.

    3. Talk about the right things. Way too much noise; too much information; surprisingly little that is useful. Bad ideas include things like Cramer. Beating an index is far less important than meeting one’s goals.

    4. Simplify. We’re nervous about making it simple – we think we may not be necessary. Complexity is not a sign of talent or a marketing tool (“they’ll need us!”). The goal isn’t to be simplistic, but to offer elegant simplicity. People will pay for that.

    5. Why? Why do we do what we do? What is the ultimate goal? We should be about meeting financial goals, happiness, freedom, security. Plan => Process => Product is the right order. We focus far too much on products. Note: real life is far more complicated than a model. That’s a real risk of automated advice.

    6. Let go. Focus on the intersection between things that matter and things that we can control. We tend to obsess over things we can’t control (Will the dollar collapse?). We should focus much more over things that really matter to us and that we have some measure of control over.

  • Q&A….
  • Is the “behavior gap” hard-wired? Yes. Noted Jason Zweig’s Your Money and Your Mind. We need guardrails between us and stupid (the behavior gap) – that’s the role of an advisor.
  • How do we do it? Keep calling people back to what’s right and true. Build trust over time; when it’s really needed, there will a store of trust to draw on to help clients make better decisions.
  • How to we act more like fiduciaries? Treat people the way they want to be treated. True transparency. Avoid or at least fully disclose potential conflicts of interest.
  • How should we talk to clients about risk? Don’t focus on risk tolerance questionnaires. Talk about experiences. How did you behave in 2000-01? 2008-09?




2 thoughts on “CFA Conference: Carl Richards

  1. Pingback: CFA Conference: Post Compendium | Above the Market

  2. Pingback: A Check-Up on GMO Fund Performance | A Wealth of Common SenseA Wealth of Common Sense

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