Make sure they meet the 3 Es


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Although the rules of personal finance can be quite simple, they are not always easy to implement – actions like saving for retirement or investing in the market require certain behavioral changes that may be easier said than done. To do.

Dr. Daniel Crosby, a psychologist and behavioral manager at wealth management technology and advisory solutions company Orion, suggests that financial decisions in particular can be best made with the help of someone else. In this scenario, he says to seek out a financial advisor who offers support on three levels: education, environment, and encouragement.

Dr. Crosby’s reasoning is that individuals, especially investors, sometimes need multiple levels of intervention to influence their behavior. “Finance is ‘simple but not easy,’ which can create a gap between knowing what we should be doing and what we are actually doing,” he told Select. Therefore, it is the job of a counselor to educate, change the environment and encourage the relationship.

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When hiring a financial advisor, look for someone who offers support through the 3 Es

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 essential that you know how to fix your car, but it’s essential that you know when your car needs fixing and when to seek outside help,” he says. This same theory can be applied to your finances. We may know the basics, but what’s arguably most important is knowing when our finances need professional advice.

As part of an investor’s education, for example, an advisor can also help them better manage their expectations, whether they are too optimistic or not optimistic enough. “It’s hard to get an investor to behave appropriately when their expectations don’t match reality, so education can provide a helpful ‘base case’ here,” says Dr. Crosby.

Suppose you are stressed by market volatility. An advisor can help provide context to show that volatility and adequate returns can indeed co-exist. This simple intervention helps prevent any incitement to fear and keeps an individual invested during downturns, which is what experts usually suggest doing. Although the market does not always go up, it is in an investor’s best interest to stay the course. Investing is a long game where you will most likely benefit from perseverance over time.

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

Looking for outside help? 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 to pay for one-time consultations with an advisor, 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-world financial advisors for an annual fee of 0.40% of your fund balance.

2. Environment

Our behavior is heavily based on our environment, 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 – how we construct our portfolios and how we consume information – both of which impact our financial or investing behavior.

“Environmental factors are often more predictive of actual behavior than intention, which means we need to think about how we allocate our assets as well as our ‘information diet,'” says Dr Crosby. “We have more or less consistent behavioral inclinations, 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 client can afford the ride,” 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 time.

The way we consume information, or information consumption, includes what sources we turn to and how often. Constantly watching the markets, for example, is the number one investment mistake we hear from financial experts. Markets are constantly changing and being in an environment where you are trying to track in real time can negatively affect your behavior, leading you to constantly check or change your investments when it is best left alone in the long run.

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

3. Incentives

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

Dr. Crosby points to research suggesting that those who work with counselors do significantly better than their “uncounseled” peers, even after taking into account a host 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 – the study suggests 1.5% per year – and decision and behavioral support. There is also evidence to suggest that working with a counselor has a positive impact on an individual’s quality of life in general, positively reflecting a person’s happiness and marital communication.

At the end of the line

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


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