Dan Ariely on Post-pandemic Financial Planning

Challenges in a virtual world

The COVID world moved us to virtual video meetings. This won’t change in post-pandemic life. Virtual meetings will be more common than before the pandemic.

But Ariely notes that virtual meetings also have challenges. It’s much harder for the financial planner to gain a sense of client values, which is important in understanding what makes clients happy. And it’s also much harder to build trust with the client in a virtual world. We will have to work harder to both understand and build trust with the client.

Ariely predicts that there will be more automation in our industry even though it can’t motivate people, at least not yet. Wording is critical. He gave the example of paying down a car loan. People in two different groups were asked the same question, phrased differently:

1. You have paid off 20% of your car. Would you like to increase how much you pay in order to save money by paying off the loan sooner?

2. You now own 20% of your car. Would you like to increase how much you pay so you will save money and own your car sooner?

Virtually no one increased their payments when asked the first question but far more did in the second group. Owning the car was more motivating though obviously the outcomes of paying off the loan and owning the car were identical. Asking questions to steer the client toward making better decisions is important.

Reminding clients of the pandemic

One positive outcome of COVID is that people who had continuing income increased their “rainy day” emergency accounts. But people have short memories, and we will be taking vacations, eating out, and doing other activities again soon. Ariely says our role is to remind clients of painful times like these.

This is consistent with Morningstar’s Christine Benz and her view of Post-Covid Financial Planning. She told me that 25% of upper income people didn’t have three months’ reserves for emergencies. She thinks automation is the answer such as having a percentage of a paycheck automatically withdrawn and going to savings.

Motivating to save – we are financial cheerleaders

Ariely says we must be financial cheerleaders, and that will be harder to do with remote virtual meetings. Eating broccoli is far healthier than chocolate cake but doesn’t taste as good (at least to most people, including me). Deferring spending is much the same and will improve the client’s long-term well-being. Part of our job is to be their motivational cheerleader.

Maybe a call to congratulate the client for reaching a financial milestone such as paying down 20% of their mortgage and increasing their home equity will motivate them to keep doing the same. Let the client know when they have moved closer to financial independence. Let’s help the client celebrate their milestones!

Money is opportunity

When anyone, including our clients, makes a purchase, they don’t think about opportunity or what they are giving up. When we buy a cup of coffee, we rarely, if ever, think about whether doing so is the best use of our money. We can help our clients think about larger purchases. For example, the client buying the $80,000 luxury car is giving something up. Help them think about what that purchase could mean to their financial future, such as working eight months longer or living in a less desirable home and location in retirement.

Ariely says we know very little about how much our neighbors are saving. But we know a lot about how they are spending. If we bring home a new car or take our family on an extravagant vacation, we get the appreciation immediately. Saving for retirement, however, doesn’t get the “thank you” for decades. Those imbalances make it hard to save since spending is more visible and more fun.

On the other hand, many of our clients (and I confess myself) have the opposite problem – it’s hard to spend money after decades of accumulation. For them, spending money just feels bad. To counteract that feeling, we must help them understand that “life is not about dying with the most amount of money.”

The purpose of the money is to bring happiness.

Ariely proposed having the client take out a certain amount of money every year and put it in their checking account. The agreement they make with themselves is that this is the amount of money for them to spend over the year; anything left over goes to charity. Though not a rational exercise, it will make the client feel freer to spend that amount of money on things they will enjoy and that will bring more happiness.

Make risk concrete rather than relying on risk-profile questionnaires

Ariely noted risk profile questionnaires are flawed and done to satisfy regulators. He says, “I hate these surveys.” People are poor at understanding the concept of risk. “People don’t take risk with money rather they take risk with things,” he observed.

Rather than asking the client how they would feel if the portfolio lost 40%, help them imagine what they would be giving up. For example, ask the client for their vision of what home they want or where they want to send the kids to college. Ask how important those things are to them. Translate what that means such as, “your kids will go to a state school instead of the prestigious private university.” Help clients understand what it means in a consumption context.

The profession is lazy by expecting the client to do the hard labor of understanding what they will have to give up in such events, integrating priorities such as housing, education, and charity and coming up with one “nonsense number” of how our client feels about risk. Circling back to his comment that life is not about dying with the most amount of money, help the client think about their need to take risk and what they would have to give up. Probabilities and consequences are both important.

My conclusion

The concept that financial planners are happiness coaches is something I’ve previously rejected. I’ve often told clients I’m not a life advisor as I’m still working on my own life. In revisiting this decision, I realize I’ve been wrong, at least about the part of helping the client better understand their relationship with money and how they can use it to increase happiness.

As Ariely said, we must understand each clients’ values to help them use their money in ways that will bring them and their families long-term happiness. Doing so will be more difficult in a post-COVID world where virtual meetings are likely to continue, but that’s a challenge worth meeting for our clients.

Allan Roth is the founder of Wealth Logic, LLC, a Colorado-based fee-only registered investment advisor. He has been working in the investment world with 25 years of corporate finance. Allan has served as corporate finance officer of two multi-billion dollar companies and has consulted with many others while at McKinsey & Company.

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