Episode 11: The Coffeehouse Investor Story
Today’s episode focuses on Bill and the Coffeehouse Investor journey. In the early 90s, Bill stepped away from his work at Smith Barney. He perceived an enormous opportunity evolving within the investment industry, including how individuals access financial advice and integrate it into their portfolios and lives. Bill processed this huge shift from defined benefit plans to defined contributions plans and submitted his book proposal for the original Coffeehouse Investor.
For Bill, his interest was peaked by his brother’s experience. During his time working for Alaska Airlines, Bill’s brother was switched from a defined benefit, or pension, to an individual account (e.g., 401k). Prior to the 1980s, if you worked for any major corporation, they offered you a pension. Based on the length of service and other factors, you then received a check during retirement for the rest of your life.
With a 401k, companies shifted the responsiblity of your retirement to you. Now, you’re charged with managing your investments. This shift has evolved to encompass most major companies.
We’ve shifted from social structures that take care of long term—-life-long employment with the same company, living in the same house for 30 years—-to expecting the individual to figure out all the pieces. We’re just starting to realize that the shift happened when we didn’t have the information we needed to make those important decisions. Since it happened during the 1980s and 1990s when the stock market was skyrocketing, we missed some of the underlying issues with 401ks.
Managing the Shift and Investor Behavior
How are we going to provide the right investments and tools for people like Bill’s brother to build a successful portfolio through their retirement years? Through both the Coffeehouse Investor and Behavior Gap, we’re looking to introduce behaviors that increase the chances of investors achieving their goals.
There’s tension between the need to pick the right investment strategy and how it can lead to the problem of behaving poorly. Coffeehouse Investor is about balancing the tension between these two things by encouraging you to focus on two things:
1. Developing a financial plan
2. Managing your asset allocation
Focusing on these principles can help put your behavior in perspective. If you have a plan in place, your behavior will encourage you to buy and sell at the best times, based on the market’s current performance.
Carl’s recent work on modern portfolio theory (MPT) has uncovered a discrepancy in recent articles proclaiming MPT dead. These stories overlook that MPT was meant to be a model, and models do not always capture reality. Russ Thornton of Thornton Wealth Management called MPT a theory accepted as scientific fact and elevated to a religion.
We can’t place too much weight in the idea that anything—-pensions, MPT, buy and hold—-is absolutely going to work. Financial planning and investing is about course correcting and realizing we need to reflect on what’s important and our values. Then, we need to take the best information we can, make a plan, and course correct. Really, the important piece is understanding that this is a cosntant process. It’s not a product or the search for Shangri-La. It’s about how you live your life versus the investment newsletter you subscribe to.
One Size Doesn’t Fit All
Over the last 25 years, if you didn’t like the stock market, you could put money in fixed-income investments. But even those who desire security now see CDs paying only 2-3% and may need to re-evaluate. However, even with interest rates so low, the right answer MAY still be putting your money in CDs, but you may need to make adjustments somewhere else. This industry has overlooked that it’s not right or wrong to put all your money in CDs, stocks, or somewhere in between.
Coffeehouse Investor puts into perspective that there’s no free lunch. You have to choose. Many articles are appearing, including Jason Zweig’s article about bonds historically performing as well as equities. Now, people are jumping on the recency bandwagon, because rates on fixed income are so low, equities are positioned to outperform fixed income options during the next decade.
You have to embrace a philosophy and re-evaluate on a consistent basis related to what’s happening in your life and in the world of investments. You may decide you can’t deal with the risk. Part of the job of a good financial adivsor is to help you understand the trade off. Your advisor should be able to say, “Everything I know about you tells me it’s ok for you to earn 4% for the rest of your life. If it’s not ok, then you can say, as a consequence, here’s what you’ll face in 10 years.”
Advisors need to be client zealots instead of fixed equity, hedge fund, or insurance zealots. This is the beginning of a new chapter of the Coffeehouse Investor and Behavior Gap. More people than ever before can benefit from common sense advice, from working with people who are client zealots and recognize different thresholds for risk and reward.
There are advisors who do get it (e.g., Secret Society of Real Financial Planners). Our goal is to help people figure out what is best for them. If you can, share this message with people. We want to spread the positive impact of what we discuss here and on our original websites.
Bill shared the story of a recent email he received from Ray. At 82, Ray wants to buy four copies of the Coffeehouse Investor book to share with his sons to ensure that the principles pass from one generation to the next and are applied to the family trust.
Ray isn’t the only one. At breakfast the other morning, Carl overheard conversations on either side of him about money and the anxiety about making decisions. The important message with Coffeehouse Investor and Behavior Gap is that we don’t have a specific philsophy for people to embrace. We want people to think about some of these issues. Some become easier, some become more complex (e.g., the personal stuff).
If our message is of value to you, please share our message. We suspect that you’ve got 97.5 friends that would find this valuable, too, if you do.
Links from Today’ Show
“A Good Time to Remember the Fundamentals”—-New York Times, 7.12.09
“Does Stock-Market Data Really Go Back 200 Years?“—-Wall Street Journal, 7.11.09
“Employees name investment adviser in 401(k) suit”—-Investment News, 7.19.09
Episode 10: The Questions You Should Ask Yourself and a Financial Advisor
What should a person consider when debating whether to work with a financial advisor?
A large number of people currently with a financial advisor are UNHAPPY with their current advisor. So, we come back to the question, why would you hire a financial planner?
Some of that unhappines may come from misplaced expectations. When Carl sits down with a prospective client, he’s meeting with people who’ve had some level of success building wealth. Their decision to meet with an advisor is often driven by life getting too complex or the consequences get bigger. You must decide if you’re going to figure it out on your own or if you’re going to get help.
So Carl asks clients, “Why now? What do you expect out of a relationship with a financial advisor?” His experience has shown that people are often looking for someone to tell them what to do with their investments, viewing the advisor as someone who’s job is to find them the best investments.
The best investments is a tricky term. “The best” could mean two different things to two different people based on individual goals. You may find yourself in interesting conversations with a financial planner asking about goals and values, to put your investment requests in context.
Bill had a new client meeting with a married couple, and in the course of opening the meeting, they pulled out their statements, asking if they’re in the right investments. Bill believes that’s the mindset of a majority of investors. The goal is often expressed as, “I just want to continue to live the life I’m living today.” This triggers the question of “right investments.” But that question is irrelevant if you don’t understand where you’re at today.
If your financial advisor isn’t asking those questions, then it’s difficult to see how they’re providing you with investment suggestions. One of the things people should realize is that we’re going in to advisors asking for a prescription, sometimes after a self-diagnosis but often after no diagnosis, not realizing that we don’t have any clue about what’s actually appropriate investment wise.
Right now, many people are approaching investing like triage. People are looking to address their recent losses, making it difficult to talk about values and goals when they’re focused on investment losses. Their purpose is to stop the bleeding first, then come back and put together a comprehensive plan later. While triage is an option, you run the risk of lowering your yields because, without a plan, your available options come with a low rate of return they come with.
Then there’s the question of what people are calling themselves: financial planners, financial advisors, personal financial specialist, etc. The first step is understanding what you want. You want arelationship with someone you can trust who can help you place all your financial decisions in context. It’s a holistic approach, asking how we fit all those pieces together. It could be you personally or someone you hire, like an hourly financial planner. If you need assistance finding one, send us an email to carl@behaviorgap.com or a tweet to @behaviorgap.
To start your search, consider what kind of compensation structure you’re comfortable with. You want to know that person is working for you and not some other entity. This issue doesn’t automatically block someone earning commissions, it only means you’re aware, through disclosure, of how that person is compensated.
It comes down to finding someone you trust, with part of that trust relying on the individual’s compentency and whether they view providing financial advice as a profession. There must not be conflicts and they must look out for your best interests, again something that can be achieved through disclosure. It’s so hard to nail down the trust issue, because we can’t offer a blanket statement about who is safe based on a job title or organization certification.
While industry designations can be important, sometimes they aren’t worth the paper they’re printed on. The philosophy or the approach of the financial planner or advisor should carry more weight with someone seeking an advisor. Unfortunately, there’s not a checklist that ensure you’ll find the perfect person to stay with for the rest of your life.
You can start by asking your neighbors, your friends, your CPA, and your attorney who they trust. When recommending other advisors, Carl asks himself, “If I were to die, who do I trust enough to send my wife to?” Some of the important questions you should raise when interviewing potential people include:
- How are you compensated?
- Are you regulated by the SEC?
- Are you required to disclose your conflicts to me?
There’s alot involved in finding someone you trust. Again, if you want help finding that someone, you can email us at carl@behaviorgap.com or tweet @behaviorgap. Also, feel free to contact us at the same locations if you have a financial planner or advisor you believe is worth acknowledging.
Episode 9: Does It Make Sense to Work with a Financial Planner?
This episode marks the beginning our discussion about whether it makes sense for you to work with a financial planner or advisor.
To start we discussed the Secret Society of Real Financial Planners (SSofRFP). The financial services industry appears really complex. It’s hard to define what it really means and what you’ll get from a particular individual. Despite the horror stories heard from family and friends, we’ve heard about people who were actually helping others as real financial planners. These people are often unknown because they don’t have big marketing budgets and they’re so busy working, they don’t spend much time talking about what they’re doing. These people belong to the SSofRFP. But how do you find these hidden people? You start by asking the people you trust.
The Compensation Issue
When Bill graduated from college in 1983, he started with Smith Barney. He discovered that one of the issues with seeking financial advice involved compensation. He was compensated by transactions and products sold, a system that is often not in the best interest of the person seeking financial advice. Bill considers the traditional compensation structure one of the flaws, if not the primary flaw in the industry. However, it’s starting to evolve to a more authentic compensation.
Why is compensation an issue? Many times as a consumer, you can’t even figure out how someone was compensated. When you look at the traditional transaction, the industry has a history of talking out of both sides of its mouth. We hear “buy and hold,” but the compensation structure encourages short-term trading. It encourages the investment advisor or broker to make lots of trades and transactions.
Finding Someone You Can Trust
You can start by asking the people you trust who they trust—-your family, your CPA, your lawyer, etc. Then, based on the list, you start interviewing people. You want to find someone who can work with for the remainder of your investing career. You want to avoid changing advisors and investment philosophies every few years. The goal is to develop a good working relationship with your advisor.
If you don’t meet account minimums, or have other reasons for not commiting to a long-term relationship, you always have the option to work with a planner on an hourly basis. The same rationale applies: you must trust the person you’re working with even if you only see them on a limited basis.
Advisor vs. Planner
When you look at the industry from the outside, it’s hard to define what the different roles mean. So what does it mean when we use the terms “financial advisor” and “financial planner?” A financial advisor looks at an individual’s investments and portfolio, while a financial planner looks at a broader range of financial issues, beyond investing, like budgeting and estate planning.
On our next show (two weeks from today, July 8), we’ll discuss the focus of advisors and planners. Does your advisor or planner focus on product promotion or on helping you work through your financial issues and questions?
Hourly Financial Service Option: Garrett Planning Network
Interested in Bill’s FREE Coffeehouse Investor newsletter? Click here.
Episode 8: J.D. Roth of GetRichSlowly.org Joins Carl & Bill
Today’s episode featured J.D. Roth of GetRichSlowly.org. J.D. was kind enough to share his story about how he managed to change his spending habits after racking up a significant amount of debt. In 2004, J.D. discovered Your Money or Your Life and Total Money Makeover and started making changes in how he dealt with money. He wrote an article called Get Rich Slowly that eventually led to a blog by the same name in 2006 about his personal finance journey and how he was getting out of debt.
The concept of doing something difficult over time but that’s worth it in the long-term is something that we face as humans. As J.D. shared, the biggest thing was setting goals. He knew he had a problem, but didn’t know how to get out. Ultimately what turned things around for him was setting goals, like saving enough money for a new car.
Beyond debt reduction, J.D., Carl, and Bill discussed the role of financial advisors and the difficulty of finding someone you can trust. People ultimately want authentic advice from their financial advisors, not a sales pitch.
Episode 7
The financial plan is only the first step. Today’s show discusses what happens after you define where you are and what’s your destination. The reality is that even though you’ve made a plan and you’ve set your goals, things change. You’re rate of return was less; your daughter wants to go out-of-state for college; you get a bigger than expected bonus.
For each of these events, you’ll have to adjust your plan, in the same way that an airplane pilot makes adjustments to his route during the flight. You both want to reach your destination, which requires a willingness to fix things as you go along. So why even set goals or make a plan if things will change? Because you have to start somewhere. Starting is half the battle.
While some individuals feel comfortable doing the planning and changing themselves, you’re not alone if you want help. Despite everything you hear about the bad apples, there are plenty of good financial planners out there. We refer to them as members of the Secret Society of Real Financial Planners (SSofRFP). Finding them is a challenge. If you’re interested, please contact either Bill or myself to help you connect with a good financial planner.
Final note: The process of planning shouldn’t be confused with the product of planning.
We’re also pleased to announce that J.D. Roth of getrichslowly.org will join us on a future show. He’ll discuss how he got started and what financial planning means now after he achieved his goal of getting out of debt.
You can find Carl’s guest post, Investment Risk and the Growth of Wealth: The Importance of Course Corrections, at getrichslowly.org.
Bill’s book, The New Coffeehouse Investor, is also available for purchase.
Episode 6
Our sixth episode that aired this week continues our discussion about values and about how we build our financial plans to match those values. As Bill points out, there’s a lot of people who have an idea how they WANT their lives to unfold, but aren’t sure HOW to make it happen.
I’m noticing among my friends that things, financially, are starting get serious. In 8-10 years, I’ll have three kids in college. Five years ago that seemed like an eternity. Now, at 37, my financial future and obligations feel much more real and immediate.
Two things trip us up:
1. Whether it’s retirement or education, we get confused with the vehicle versus the trip.
2. “I don’t know what to do. It’s overwhelming.”
Some times there’s so much anxiety, stress, and tension around setting financial goals. Either sticker shock or the fear of change shouldn’t stop you from creating an awareness of what’s really important to you. We need to approach our financial goal setting with the knowledge that change will be involved.
If you’re interested, the financial tool Bill mentioned in the show is called Torrid Technologies.
Episode 5
In the most recent episode, we continue our discussion from last week by asking the question why. Why is it important to ignore Wall Street and get on with your life? (a nod to the Coffeehouse Investor tagline) How can we live a richer life, not only financially, but emotionally, too? Do you have an opportunity to gain a better understanding of how you’re spending your capital (money and time)?
Here are the links to both the post and the books we refer to in this show: Office Space: Why I Rented a Place to Right (George Kinder/getrichslowy.org) Your Money or Your Life The Soul of Money Again, if you have any questions you want us to address in the next episode, please email me at carl{at}behaviorgap{dot}com.
Episode 4
This week’s episode focuses on the goal of defining where you are today and where you want to go. While this process sounds simple, many people aren’t sure where to start.
Episode 3
This week’s show tackles head on the news that a government stalwart, Social Security, is in deep trouble. In particular, we address how we can no longer rely on Social Security as a part of our retirement plans. Investing is no longer child’s play.
Taking personal responsibility for our investments will be key in securing a sound financial retirement. We’ve seen seismic changes during the last five years with regards to “traditional” retirement planning. We have to rethink our approach to investing and our expectations when it comes to retirement.
Episode 2
This last week, Bill Schultheis and I recorded the second episode of our weekly internet radio show/podcast, Behavior Gap Goes to the Coffeehouse. As always, if you have any questions, please email them to me, carl{at}behaviorgap{dot}com, and we’ll do our best to answer them during our shows.
Today’s podcast is about how to start the investing process. We use an email I received from someone looking for specific suggestions to give you ideas of how to tackle investing for the first time.
