Nick Murray talks about how an advisor earns his or her weight in gold and very little of it has to do with asset allocation or fund selection, although those aspects are obviously important. Murray was very early to the insight that guarding clients from their own emotions and protecting them from six-figure mistakes was the true calling of an advisor – and why, as he puts it, “god sent financial advisors into this world.”
Reading this insight, in his masterpiece book Simple Wealth, Inevitable Wealth, had a profound impact on me and helped to shape the belief system that Barry and I are building our firm on. Sharing this big idea, in a multitude of ways and formats, is, to some degree, my life’s work.
Not a week goes by without some powerful example of why it’s so important coming across my path. Every shred of evidence confirms that this is the key to what we as advisors do.
Here’s a new example, courtesy of researchers from the University of Missouri:
Older Adults Have ‘Toxic Combination’ of Lower Financial Literacy, Higher Self-Confidence
COLUMBIA, Mo. – Previous studies have shown that as humans age, cognitive declines are inevitable. Now, a recent study by researchers at the University of Missouri and Texas Tech University has confirmed that this cognitive decline extends into financial literacy. The researchers also found that older individuals retain a strong sense of self-confidence, which could add to the problem, leading to significant mistakes when making financial decisions.
“Mixing a decline of financial literacy with an increase in self-confidence is a toxic combination,” said John Howe, professor and chair of the Department of Finance in the Trulaske College of Business. “This opens the door for more honest mistakes as well as fraud. It’s widely known that older adults are very common victims of financial fraud. It’s important that as we age, we find someone who has our best interests in mind when managing our finances.”
In the study, Howe and his colleagues, Michael Finke and Sandra Huston from Texas Tech University, surveyed more than 3,850 individuals 60 and older and found that they experienced increasing declines in financial literacy, which is the ability to understand and make good decisions about personal finances. The researchers also found that the participants’ self-confidence increased slightly. This meant that even though they didn’t understand financial terms or policies well, they still believed they could make good decisions about their personal finances.
I didn’t need to see this study in order to know that this is true.
I’ve seen the phenomenon in the field for almost twenty years, even before I understood the concept. Some of the worst mistakes I’ve seen made were committed by investors who had found success in one arena in life, and then became convinced that their skill was translatable into investing or trading. As they got older, their confidence in their own abilities and insights grew, even as their skill level or cognitive ability declined. This is something that is nearly impossible for a person to detect about themselves from the inside looking out, regardless of training, intelligence, experience, etc.
People will point to Buffett, Munger, Icahn etc as counter-examples, to which I would say that the only reason you know their names is because they’re so rare – the availability heuristic.
More details on the study here:
If you’re an advisor and you haven’t read Nick’s book yet, I don’t know what you’re waiting for: