Dr. Daniel Crosby is helping people see Advisors as the decisional guides and life coaches that they truly are. In this week’s podcast episode he shares his insights, why he’s an advocate for the advisor, and the role of behavioural finance.
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Dr. Daniel Crosby is a psychologist and behavioural finance expert who helps organizations understand the intersection of mind and markets. Dr. Crosby has penned three books. The first two; Personal Benchmark: Integrating Behavioral Finance and Investment Management (2015) andThe Laws of Wealth (2017) were on the New York Times bestseller list, and named the best investment book of 2017 by the Axiom Business Book Awards. His latest work, The Behavioral Investor, was Axiom's best investment book of 2019 and is a comprehensive look at the neurology, physiology and psychology of sound financial decision-making.
Dr. Crosby found his niche from a conversation with his dad. He was into his doctoral program - burnt-out - but loving both human behaviour and psychology. His father (a financial advisor) shared how there was a ton of psychology behind the work that he was doing. And thus, this single conversation led to where he is today. With all his research and study, he found a tangible, practical way to serve other financial advisors, like his dad.
So, what exactly can science teach us about behavioural finance?
In his book, “The Laws of Wealth,” Dr. Crosby outlines the 10 Commandments of Behavioral Finance. In our conversation, he shares his top two and why it's important for progressive advisors to put these commandments into practical terms with their clients.
First up: “you can control what matters most”. You have power, even though you’re likely conditioned to think otherwise. There’s always some external excuse in the news that someone can use to justify their financial decisions, whether it’s COVID, politics or some societal movements. But in fact, quite the opposite is true when we look at the best determinants of whether or not people reach their financial goals. It's simple, uncomplicated things that are in your power. Questions like:
It's not what Biden does or Trudeau does or the Fed does. It's what you do.
Second: In his book, Dr. Crosby says that people need a financial advisor - but maybe not for the reasons you think. It’s not just about someone helping you achieve mind-blowing investment returns.
Most people think that when they’re hiring an advisor, they’re hiring someone who is helping them with grandiose monetary returns. That's just not the case. Financial advisors - as savvy as they are - don't have perfect knowledge about stock picking and the future trajectory of the market. But research shows that across a handful of different studies, people who work with advisors not only make way more money, they’re globally happier. People who use an advisor have better marriages and communication. Even the divorce rate is lower!
A big reason for the outperformance of people who work with an advisor over the medium to long term is just simply that advisors help keep clients from making catastrophic screw ups. People that don’t make these major mistakes can double or triple their wealth on average.
The literature is unequivocal that there are a number of reasons to work with an advisor, both both financial and personal, but that it's not for the reason that you think.
It’s been a crazy four years in the marketplace. Crypto, wild valuations in the market and NFTs just to name a few! Why do people jump on board some of these crazy trends?
It’s because of fear. Thanks to COVID-19 and the uncertainty that came with it, there has been an influx of existential angst. There were parts of the country where people didn’t leave their homes for months. In a way, our lives had been completely de-risked. We know that people are risk averse sort of in aggregate, but humans want a little excitement. Many people took that angst and risk and found an outlet for it in meme stocks, in crypto in the crazy valuations we saw.
According to Dr. Crosby, behavioural finance should be a mirror into our own behaviour and not a window onto others. It’s easy to see the madness and judge what people did. But we’re all susceptible to these things. He digs into the four primary types of investor biases in his book, “The Behavioural Investor,” It’s some great insight into the mind and why people do what they do with their money.
Dr. Crosby believes that it’s important to be contrarian in a principled way, not only in your personal life, but in the markets as well. It’s something he passionately talks about in his famous TED talk.
We’re taught that the way to be happy is to do what others are doing and follow the trends that everyone else does. We've been sold this shallow bill of goods about looking a certain way, having the right bag, the right car, the right bank account etc. and now, people are learning that it’s actually not what it's cracked up to be
In life and in markets, we need to pick our North Star. We need to know what we're about, and we need to pursue that with vigour.
Warren Buffett is a prime example of this in the markets. “Be greedy when others are fearful and fearful when others are greedy.” Be principled in how you work it. You have a method of thinking about markets and you're staying true to that.
Be sure to check out Dr. Crosby’s podcast, Standard Deviations on Spotify (link: https://open.spotify.com/show/1uQPuBpfpomaUNkwY7SkcH ) and Apple (link: https://podcasts.apple.com/us/podcast/standard-deviations-with-dr-daniel-crosby/id1241946146 )
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I’d love to talk to you more about how you communicate with your clients! What are you doing to make sure they feel seen and heard? Why not have a virtual coffee with me? I’d love to chat with you more about it and how you can accomplish big things in your business in 2023!
Set up a virtual coffee with me here: https://aspect.ipcc.ca/turning-the-page-podcast#grabcoffeewithchris
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Let’s talk soon!
Chris
Investment Planning Counsel
Aspect
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