“Good advice is all around us and people simply choose to ignore it much of the time.” – Ben Carlson
I quote and reference Ben Carlson in my Insights more than any other financial expert. Carlson’s blog is one of only a few publications that I read religiously every day. Recently Carlson wrote a post entitled Good Advice vs. Effective Advice that I thought was really insightful. The point of the post is that giving someone “good advice” is rarely enough. Most of us already know what we should do, or what the right answer is…yet often times we still do the opposite. So advice moves from being “good” to being “effective” when it is tailored and delivered in such a way that actually spurs the behavioral change needed to attain the desired outcomes.
Carlson offers a long list of examples comparing and contrasting good vs effective advice. Here are a few of my favorites, along with some of my own comments. (NOTE: All italicized sections are direct quotes from Carlson’s post.)
Good advice is preaching to your clients to stay the course.
Effective advice is building portfolios that are durable and behaviorally aware enough to help clients stick to their plan.
These two examples touch on something we talk about frequently. There are a lot of different styles, philosophies and approaches to long-term investing. They all have their own merits and drawbacks related to the actual investment theory behind them, but beyond that they also have different implications for our human emotions and psychology. Clients of our firm know we are hyper-focused on protecting our clients against large drawdowns and creating more consistency in the year to year results they see in their portfolio. We do this because we believe going through large swings up and down in your portfolio can lead to all sorts of emotional angst, opening the door to poor decision making. For more thoughts on this see our post The Cost Of Being Human.
Good advice is universal.
Effective advice is personal.
While there are many great rules of thumb and universal principles by which we can all live by, we have found that the best value-add opportunities come when we are delivering custom-tailored advice within the context of a personal relationship. Financial complexity only increases as our clients’ families and businesses grow and along with that complexity comes opportunity. By taking a holistic approach, maintaining our independence as investment advisors and collaborating with other professionals in an open architecture environment, we are able to deliver advice and solutions that are exactly what the client needs rather than trying to fit the client into off-the-shelf financial products.
Good advice is theoretical and unemotional.
Effective advice is practical and takes into account human nature and behavior.
Financial decision making is not only about the economics. We also have to account for human nature, personalities, preferences, risk tolerances, etc. Sometimes the right financial decision might not be the one that has the highest odds of fully optimizing the bottom line. The “soft” costs and/or benefits of making certain decisions will sometimes take precedent, or at least act as a tie breaker. These elements often come into play when purchasing insurance, deciding how to handle debt, or seeking a balance between saving for the future and enjoying the present.
Good advice looks for the best ideas.
Effective advice looks to destroy the worst ideas.
We think there is much more value to be gained in eliminating counterproductive behaviors and avoiding the big mistakes than there is in catching every opportunity perfectly. What’s more, avoiding mistakes is much more a function of our control than seizing opportunities. Warren Buffett is quoted as saying, “You only have to do a few things right in life so long as you don’t do too many things wrong.” We think that’s good advice, which is why we often start by “destroying the worst ideas” and work backwards towards “looking for the best ideas” as a secondary endeavor.
We have a long way to go in our pursuit of moving from “good” advisors to “effective” advisors. We are constantly learning what this takes and trying to make the appropriate adjustments. We look at our client relationships and think about what they will look like decades into the future. We know that in order to have the impact we truly want to have on our clients’ lives, simply giving them good advice will never be enough. We need to deliver advice and solutions in a way that effectively empowers them to meet their objectives, and ultimately to pursue what makes their lives truly rich.
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
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