Behavioral Finance and the Two Lane Highway

Even though the “Robo-Advisors” would disagree with me, today I would argue that in this day and age the most important thing a financial professional can do is relate to the “art” and not the “science” of their profession.  In other words, the most successful financial professionals I have ever worked with would agree that it is about the art of simplification, analogies, storytelling, managing clients’ emotions so they make healthy financial decisions, and to help them through good times and bad times.  I do believe the “science” of algorithms, Monte Carlo Analysis, alpha, beta, sharpe ratios, etc.; they are all important, but should they take a backseat to the “art” of BEHAVIORAL FINANCE?  Let me give an example of a simple behavioral analogy I like to use in financial professional and client seminars.  

A fitting analogy is that buying high and selling low in the stock market is a lot like driving down a two lane highway. Pretend you are sitting in the right lane and both lanes are at a standstill. What do you do when you notice the left lane is starting to move? You move into the left lane. Shortly after that, the left lane always comes to a standstill. Well, shortly after that is typically when you see the right lane starting to move forward. So then what do you do? You move back into the right lane. What happens to the right lane at that point in time? It comes to a standstill. But of course, that is when the left lane opens up and you hopelessly jump back into the left lane. Many of us do this over and over again to then realize that it is a losing proposition. Why does this phenomenon happen with traffic where it seems like you cannot win by switching from lane to lane? Because everybody else has the same idea of jumping into the same lane as you, the moving lane, and eventually the bubble bursts and traffic comes to a standstill. Due to the fact that everyone moved from the other lane and thus "emptied" it, the other lane opens up. At that point, everybody jumps back into that other lane and you create another "bubble“ that stalls traffic. 

That is very analogous to how the stock market behaves. Because people buy high and sell low by chasing each other, they actually do not perform as well as what the market actually does over the long haul. 

Some of the most profound studies in this area have been done by the financial services market research firm, DALBAR. Dalbar recently launched their 22nd study on investment returns versus the returns actually experienced by investors. They found that over the 20-year period of time ending December 31, 2015, the average return for equity mutual fund investors was only 4.67% even though the average in the S&P 500 was 8.19%. Thus, a 3.52% "gap" in investment returns versus investor returns. This "gap" on a $100,000 investment can mean significant damage to a pre-retirees’ or retirees’ retirement portfolio. For example, if that $100,000 gets 4.67% over a 20-year period of time versus 8.19% over a 20-year period of time that is the difference of having $249,140 versus $482,772 by the end. This is a difference of $233,632 by "buying high and selling low." And this does not include the negative impacts of taxes and trading costs for the investor that moves in and out of the market.

So again, whether it is providing simplification and analogies like the two lane highway or managing a clients emotions so they don’t “buy high” and “sell low,” today this is one of the most important topics a financial professional can use to “sharpen their axe” which is the study of Behavioral Finance.  

Learn more in the full white paper "What Robo-Advisors Cannot Do That You Can. An Introduction to Behavioral Finance," by Charlie Gipple, CLU, ChFC. 

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Questions or Need Case Assistance: Contact the Partners Advantage Brokerage Team at 888-251-5525, Ext. 700.

For financial professional use only. Not for use with consumers.

Please note that in order to provide a recommendation to a client about the transfer of funds from an investment product to a fixed insurance or annuity, you must hold the proper securities registration and be currently affiliated with a broker/dealer. If you are unsure whether or not the information you are providing to a client represents general guidance or a specific recommendation to liquidate a security, please contact the individual state securities department in the states in which you conduct business. The information in this presentation is for general use and while we believe the Information is reliable and accurate, it is important to remember individual situations may be entirely different. Therefore, information should be relied upon only when coordinated with professional tax and financial advice. You need to take into account your client's health and legacy goals. Neither the information presented or any opinion expressed constitutes a representation by us or a solicitation of the purchase or sale of any insurance or securities products and services.

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What Robo-Advisors CanNOT Do That You Can; An Introduction to Behavioral Finance

Whether we are talking about life insurance sales, annuity sales or investment sales, one thing is undisputable, MONEY IS EMOTIONAL. Learn how to separate yourself and your practice from the "Robo-Advisors" by understanding and implementing behavioral finance. After all, Behavioral Finance and Speaking Your Clients' Financial Language can become one of the main determinants in your clients' success in their retirement planning process.

BONUS: We will also provide insights on how you can

Better understand the Allianz annuity
story by explaining the features of both the preferred and standard portfolio: Income Now. Income Later. Income Never.

Join Us on June 22

11 AM PDT, 12 PM MDT, 1 PM CDT, 2 PM EDT

Register HERE

Nationally recognized indexed product educator Charlie Gipple, CLU, ChFC will provide insights on how you can help your clients better understand how fixed annuities might work within their overall retirement income roadmap.

Questions?

Contact the Partners Advantage Annuity Advantage Team at

888-251-5525, Ext. 709

For financial professional use only - not for use with the public.

Product and feature availability may vary by state and broker/dealer.

The calculator is designed to highlight the income feature only. Keep in mind that FIAs are designed to meet your clients' long-term needs for retirement income. They provide many benefits for your clients, including principal protection, the potential for tax-deferred growth, and a death benefit for beneficiaries. Always consider each of the features available and how they work when considering if a product is appropriate for your client's needs.

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Post DOL Fiduciary Standard, Robo-Advisors Versus Real Advisors

By: Charlie Gipple, CLU,^® ChFC^® - Senior VP of Sales & Marketing, Partners Advantage

This is an excerpt to the full whitepaper by Charlie Gipple: "What Robo-Advisors CanNOT Do That You Can An Introduction to Behavioral Finance"

Whether we are talking about life insurance sales, annuity sales or investment sales, one thing is undisputable, MONEY IS EMOTIONAL. I believe financial professionals can never be replaced, because “robo-advisors” cannot adequately help manage the clients’ emotions and behaviors! Here's some insights into why.

Traditional Finance is what we have been taught. Traditional Finance would lead one to believe that helping our clients is more of a science than an art. This is the mathematically and scientifically fun stuff you read in the textbooks, such as efficient market hypothesis, correlation coefficients, charts, graphs, standard deviations, alpha, beta, and of course, the big one, Modern Portfolio Theory.

The Emotional Tail Wags the Rational Dog

Traditional Finance is the thought that what we doing financial services is more of a science than an art. I am a fan of “Traditional Finance,” and I have studied it a lot as I have a finance degree, two designations and four securities licenses. What does all of that mean, however? It means absolutely nothing, unless I can also help my clients with their behavior as well. Nothing else matters if investors’ behavior gets the best of them.

Furthermore, at the level of your client, these errors in their minds, in turn, can harm the success of a retirement and/or insurance portfolio. In other words, you as an agent/advisor can lay out a perfectly sound mathematical and scientific argument for your clients to either take action (buy insurance, for example) or not take action (buy and hold), but, if they have a “bias” in their mind that completely cancels out your rational argument, you are spitting in the wind.

In a world where supply and demand drives the price of multiple types of traded instruments up or down, when investors commit errors in thinking/judgment, the prices on these “traded instruments” tend to be different than what they would have been in an error-free environment. This is because the decisions of investors, whether rational or not, are what drive the prices of “investments” up and down. Bubbles and discounts do happen and have happened. The “rational models” have failed.

Therefore, you have this proliferation of behavioral finance. This is “the study of how finance is affected

by psychology. It attempts to understand a and explain how human emotions influence investors in their decision-making process.”

Now, why is behavioral finance a “new thing”? Why has it only been around for a couple of decades? Why have many agents never heard of behavioral finance? If it is so important now, then how have we lived without it for all this time? In other words, what is the paradigm shift that has taken place where behavioral finance should now be introduced into your practice when it was never a thought in previous years?

Find out more in the full, 14-page whitepaper by Charlie Gipple: "What Robo-Advisors CanNOT Do That You Can An Introduction to Behavioral Finance" Fill out the form below to request the full whitepaper or call Partners Advantage direct at 888-251-5525, Ext. 700.

Fill out my online form.

For financial professional use only. Not for use with consumers.

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