Behavioural Investing Series #3 – Transcript

Fraser Jack
Hello, and welcome to this topic series on behavioral investing, where we take a deep dive into the client and advisor decision making process. My name is Fraser Jack. And in this episode number three of five, we tackle values based decision making from understanding what motivates your clients actions and behaviors to finding investments that reflect your client’s goals, as well as their values, allowing clients to take ownership in the decisions that you make together. If you are having these types of conversations with your client, or thinking about it, you’ll get a lot out of this episode. Thank you, everybody, for joining us. Again, we are in the midst of talking about values based decision making, we’re halfway through our five part series. And we’re starting to get a little bit deeper into the way that human beings work with. So I’ve covered off on some of the biases. We’ve talked about how goals are such an important part of that process. I’m joined by Patricia and Catherine, thank you very much for both for being here. Katherine, I’m going to throw to you on this one to start with, we’re going to talk about talk about how values, you know, control people’s behaviors and the decisions that they make to kick us off of what your thoughts are.

Dr. Katherine Hunt
Values control all of our decisions that are both conscious and unconscious. So we move towards our values always. And if we aren’t moving towards our values as individuals, we know because that’s when we won’t be feeling good. So there’ll be some kind of, you know, they call it these days have mental health issues. But it’s basically how you, you’re not feeling good. And the reason is because you’re probably not living your life in accordance with your values. And so I see the values discussion is really cool because of that, because it’s so important to each of us. But I see it in the advice relationship as even more important, because there’s that, that famous line that clients want to or not all, of course, but most clients want to pass on their values, they don’t want to pass on their valuables. So when when we start to think about clients in terms of big family units that probably carry similar values within those family units, and start thinking about them as a group of people. And we’re the facilitator of how to how to actually ensure that there’s a intergenerational carrying on of the good quality values that got their family to the point where they are today. That’s such an empowering discussion, I think for clients. And it’s the kind of discussion that’s going to make them kind of bounce out of our offices, not not just slumped out, because they’ll be really, they’ll be so empowered to thinking about the next generations and the kind of family empire that they’re building in a way. So that’s I kind of see it with those those two components.

Fraser Jack
Yeah, it’s super interesting. You know, when you talked about the idea of not quite knowing, you know, you have that feeling we you know, something’s not quite right, or it’s just incongruent with your values. But then I also find it’s often very difficult for people to be able to articulate what their values are, because they haven’t necessarily done their work. Patricia, when you have clients come into the office and and you’re talking to them about the you know, these decisions, and you’re looking for these triggers and values that are going to dictate what the goals might be, do work with the clients anyway to try and find these out. How do you go about understanding what a client’s values are?

Patricia Garcia
Yeah, no, it’s a great question. And to be perfectly honest, it’s something that I want to improve in our business. And I think it’s something that the majority of businesses still need to work on. There’s a lot of the why you know, why isn’t quite a wide isn’t gone to there helps but I still think there was We lacked tools to really drill down into what our values are, what our clients values are, but and also explain to them why we’re even doing it for some clients and even advisors, it can be an uncomfortable conversation, because you know, someone comes into you, they don’t even know you, they exposing their entire financial situation and mistakes that they potentially embarrassed about, and a lot of things to a complete stranger. And then you want to ask them about why and why things are important. My bet is, is quite, I find that quite difficult to tackle early on. And even with the tools that I’ve tried to use in the past that, you know, have been proven to work, I think that that probably the solution is a combination of both, it’s, you know, starting slow, and then slowly building the trust and slowly learning more, the way I’ve done it given, I don’t have the perfect solution is the getting to know my clients. So the more you get to know them, the more you start understanding their values, just by the way that they talk to you without even having to ask specific questions. But it’s definitely something that I think we should improve on in financial planning is a lot about being a little bit of a psychologist and counselor in a way, which is not our area of expertise. We didn’t go to university to learn that. But you know, we need to improve our people skills and, and drill down on those things to help with behavioral decisions. And I think that, you know, that that is extremely important and potentially an area that needs to be explained to clients and advisors better from, you know, from when they first come on board. And also when when when advisors go to diversity. But yeah, like I said, the way I do it is by asking some questions early on, and then learning more about them. And then not It’s not like a full on what’s your values, you know, what’s important to you and drilling down it sound little by little by little, and you building that. And then as you build more trust, you actually find that they’ll tell you things that they didn’t tell you at the beginning anyway, even if you put a question in front of them. That’s why, you know, I am a strong believer, they’re robo advisors as a place to reduce fees and how people can afford advice and address certain things, but he will never address this because not even humans with PhDs are amazing at addressing it.

Fraser Jack
Here’s a really interesting point, Patricia, that. And I’ll ask you about it, Katherine, because that that concept around building trust, and, and just going back, Patricia to your you know, passing on values, not valuables that there could be a great way to introduce the conversation with your clients, you know, we had to deal with your valuables as well as you know, your values, that trust thing, you know, obviously going in deep into somebody and doing some work with somebody on their values, you kind of really do need to have that deep level of trust. Catherine, what are your thoughts?

Dr. Katherine Hunt
It’s very true. And there are some people who are experts in exactly that building that trust in a very short amount of time in the initial meeting. And like you said, Patricia, they’re probably from a field that’s not the business school. They’re probably from from one of the other sectors. But I remember when I started being a financial advisor 2007, kind of similar timeframe to you, I think some of the GFC. And the conferences that I was going to with the AFA in particular, had these, what I call the old life fees. And they had these incredible way of like a sequence of talking to clients to elicit their values. And then to, because it was they were kind of the old school style of then, of course, kind of providing a solution as well as some kind of solution that actually aligns with their values. Within one discussion, which inspired me so much to think about this is actually this is possible, you can it can be done. It’s not something that we are taught at university, it’s not something that is really detailed in our codes of ethics, or in the regulation. But it’s something that can be used to really develop those client relationships at such a deep level. And once we have actually built the trust so we can build trust in lots of different ways. We can either build trust, quite quickly using some of these very specific psychological techniques that for example psychologists have to use or else they’re going to have the first five meetings are going to be completely useless. Or of course it can be just time so can just be attend client has been with us for 10 years is going to be trusting us. As simple as that. Once we have that trust, regardless of how quickly we get it and we can engage in that level of discussion about the values. The powerful the power of our relationship with that client is going to be so much deeper, so much more connected to who they are really at their core. So the like, the goals based approach is such a fantastic approach, because it’s so easy to help clients to understand that they are moving towards their goals, they’re going to achieve their goals, and we helping them on that journey. And it’s so empowering. But that’s almost superficial in some way to who we are as people, which is very much our values, and very much, almost everyone, if you give them the list of possible values, one of them is family. And the list of almost everyone says, my number one value is family. And then so the next discussion is, of course, fantastic. Tell me about how much time you’re spending with your family. Oh, yeah. Well, I see my parents, once every two months, they do live a couple of hours away. Oh, right. Okay, great. So let’s have a discussion around that. And help help you to be living your life according to your values. So I see it as something that can be so empowering, especially when that’s it. There’s that intergenerational discussion. I imagine if we had a KPI that was how many intergenerational clients do you have as, as an advisor as a just innovate, just be a KPI on how well do you do values based advice? I suppose? Because that’s what it is. If you’re doing that, then well, as well as other ways that bringing in everyone else. Yeah,

Fraser Jack
Catherine, this is you got some really good points there. One is obviously knowing your client. And I think that values is a great part of that. And, and you also mentioned the idea around, you know, everybody, you know it when it comes to values, you can see a list and go Yeah, that’s definitely what my values are. But I think this is one of those areas where past performance is an indication of future performance, when it comes to values, because people often have, you know, like you said, the behavior, you know, this is my value. Great. Show me your diary, show me how that actually works out for you. Because if it was a true value, you probably put more prioritization around it. So what are your thoughts around this concept of, you know, understanding your past decision making, especially with domain values based decision making? What are the past decision making? Tried to that you’ve you’ve made decisions on, that might be an indication of what your values are?

Dr. Katherine Hunt
In psychology, we use behavior as such a fantastic indicator, and we will use it in in financial advice as well. So one of the questions, of course, is, tell me about, you know, what your values are your family or your your, your perspective on risk? And then the other question is fantastic. So you say you’re a conservative investor, and you really don’t want to take any risk. Great. Tell us about some of the investments you’ve made. Oh, I own three rental properties in the suburb of Nerang. On the Gold Coast. Right. Okay. So, and they’re all there. They’ve all got mortgages, yep. Okay, excellent. So, obviously, what you say and what you do are completely different in that, in that instance, and in the financial space, that’s kind of an interesting, easy discussion to have about that contradiction. In the personal space, though, it’s really difficult because the person which is most of us, who would rate our family values as one of our highest values, yet, we don’t invest that much time, with our family, with our parents with our extended family. That is one of the main sources of that sense of unease potentially, that the person has or whatever, however, that manifests in their life, the not being 100%. Happy. So if we can identify what that is. And that discussion is a very complicated discussion, because they’re not expecting to have that discussion about living their life according to their values and how we can play a role in that what is it that stopping them from seeing their parents more? And can we support that as a goal that we can we can work towards achieving? That’s a hard discussion. I don’t know how that would play out in the coalface. Do you have experience with that? Patricia?

Patricia Garcia
Yeah, that’s really interesting how you can see that play out in your meetings, you know, with our business, we doing to intergeneration advice, like, you know, we’ve got great parents, parents, children, grandchildren, and it’s really amazing to even see the way that they comment about each other, and, you know, the family interactions and all of that. But one of the things that we, one of our philosophies is that we believe that money is only as good as the members is advisors. And that’s a way that we, so we remind them of that philosophy, and we remind them of their goals and making sure that they being aligned, and I know, are you sure you want to keep working longer? Are you sure you want to not spend as much time with your family? So that comes into play? About getting the balance, right? And what I say to people, to my clients is that everyone’s balance is different. And, you know, there isn’t a one size fits fits all balance, you know, the balance doesn’t actually mean that you actually have to work less. For some people that could be working less for others. It’s not, so they need to decide what the right balance is for them. And they need to decide what the right memory is that they want to buy. Ah, and essentially, our job is to remind them of that there. So they’re not in just the, you know, hamster wheel, that they leaving their lives along the way, and that they’re going to essentially look back and be proud of what they’ve achieved. And, you know, no one’s perfect. All of us do that. I don’t live by that myself all the time. But I keep reminding myself of that. And I think it’s important to, to keep doing that with clients and figuring out their own values. And you do that by the, you know, the goals that they have, by the things that they told you that they are afraid of excited about. And that’s what can essentially be a trigger for them to change the path of they’re going on,

Fraser Jack
Patricia, I really love that saying money is only as good as the memories that advise you, I think it’s a fantastic realization that this is all about to human business that everybody’s in and the money forms part of that. And by bringing that money in that investment, or that conversation on those goals, back to life back to an emotion or a feeling, you know, money, money’s money’s nearby your magical moments, I think it’s a great, I think it’s a great way then of cementing that in the client’s mind and in their values to understand and be able to, you know, tell their friends about that at a barbecue. We might leave this particular subject here, we could we could talk about it for hours. I just wanted to, to fly well, we’ll catch here, we’ll chat to the To begin, we start talking about risk profiling in the next episode before, as we continue our conversation into values based decision making. I’m joined again by Dan and David, thank you for joining me, gentlemen, I’m going to start with you this time, David, tell us about your thoughts and ideas around values based decision making. Obviously, we covered a lot of things in the previous episodes around bias and risk. But tell us about your overview. Yes,

David Bell
I probably start in institutional world. So what’s happening in big super funds, and what’s happening in big pension funds around the world and what’s happening in Global Investment Management around the world, and they’re the push is strongly into accounting for ESG. And thinking more and more about sustainability. And the push there is significant, the trends are there, they’re only going to get stronger. And yeah, I still see a lot of that I’m sort of on the edge of observing that in a pretty constant way. But then also think about where kids challenges again, for the vast community because and there’s some key differences here. One is that when you’re a super fund or a pension fund or an institutional investor, you actually overlying your own values, and you’re integrating them into the way that you manage a portfolio and a member or an investor can choose to participate into that portfolio. So sort of one definition of values and, and move move from there. Whereas we have a vise world understanding, wow, this is what a challenge because, yeah, it’s based on individual conversations, tailored financial plans. And so one of the key things I’m interested in exploring today is, well, do you have personalized definitions of value? And if so, where how this way?

Fraser Jack
I definitely want to get into that conversation. But before we do that, I’ll throw to you Dan, as well. What are your thoughts on this? On this topic?

Dan Miles
Yeah, I find it extremely interesting. I’ve had conversations with people quite frequently about ethics and values. And, you know, we can start off simply with things such as ESG, you I had a conversation with somebody recently, who looked at what, you know, one, you know, ESG metrics score showed somebody as being extremely high and another one extremely low. And then like, how can that possibly be a similar ethics mean different things to different people that different people have different values, if you speak to a, if you might speak to a priest, or somebody who’s highly religious, and the idea of investing in a company that produces condoms, might be very unethical. And yet, if you talk to a missionary in Africa, they think that one of the most amazing things for preventing disease in the world, they’re two completely different, two different values on the exact same topic. But values is not just around ethics, it’s also about things like you know, fees, and you know, the quality and, you know, what, what do you personally value like, what is it that you want? What is it that you value out of the world, a lot of people it might be money, a lot of people might money maybe have just be a means to an end to achieve certain things. And I think there’s just there’s there’s an enormous challenge in that we as an industry have not provided advisors with anything like the level of tools that they need to be able to have conversations with clients to flesh out what those what those values are to them so that not only what are they are watching what how important they are, but potentially, you know, how you would you would rank them and how you would progress revising. I think that that’s a huge challenge. And a very interesting one that I’m sure we will overcome, but it’s not going to be tomorrow,

David Bell
if I just add a little bit of data to what you’re saying, then then just to go back to that ESG piece, and just highlights the dispersion amongst interpretation, before we even get to values just on ESG. And there was a piece of research that took the three prime, the three largest ESG, sort of ratings providers, and looked at their ratings across different companies. And the correlation between those ratings was only point four. And if you do that, in credit world, where you take the major credit houses and their credit ratings of different companies, those credit, the correlation between those ratings is point nine. So something objective like credit risk becomes really consistently applied by different parts of the industry. But then when you get to ESG, a lot more qualitative, a lot more interpretation involved, you get a little consistency. And then you go a step further, and you actually get into values he had to say it would break down forever again. So what a difficult situation,

Fraser Jack
it is very difficult for managers not obviously, that’s probably why they have more of a scale of deep green to light green two, are we influencing or excluding? So we can go there. But then just to your point, there was a lot of advisors doing, or getting into involved with this now understanding or wanting to understand the client values, and maybe even talking about their own business having values and their own businesses, and trying to attract clients that have similar values to their business, therefore making it easier. But yeah, you’re right. Right. It has been a difficult one, obviously, we’ve had a No, I know, your client part of E Corp. Sec for many, many years. But that was taken, I guess, early on to knowing the metrics of your client, not necessarily knowing the values ie client.

Dan Miles
Yeah, no, absolutely. And how does one understand the values of the client, there are tools that are coming out, you know, where people can complete things such as impact assessments. And, you know, questionnaires that advisors have their own back, because they haven’t been given the tools themselves to be able to, you know, have a values based questionnaire to try to flesh out from their clients what it is that they value, and I think there’s a challenge that should be put back on the on the product providers is to provide a plethora of solutions. Because this, this concept of one size fits all is clearly nonsense, there needs to be variability in in the availability of product to be able to provide for the fact that, you know, everybody is different, each situation is going to be different. Yeah, there might be a lot of overlap and correlation in certain pockets of people that’s fit certain demographics, or six fit certain regional areas, or whatever the case may be, but there is still that level of variability in terms of, of being able to provide a product that helps to achieve those values. And so we need to, as an industry provide better solutions, one to allow advisors to flesh out what, what it is that that is really, really important to the client, to prioritize it. So that because you know, you may need to give up something to get something. And three have viable solutions that you can put together and provide to them that, you know, may not be the exact solution, but you know, is at least a best fit, as opposed to a one size fits all approach, which I believe is largely come from the institutional space where, you know, David, as you mentioned, the other the correlation across those, those three institutional spaces on ESG. I mean, we just look at the view on uranium, I mean, a uranium was a negative screen on every ESG filter in the world 10 years ago, and yet now the demand for uranium because of the push to ESG has completely flipped. But that’s at a large institutional level at an individual client level. It’s so much more personalized, and that’s where I think we’ve we’ve kind of failed as an industry and we need to help advisors with those values based questionnaires and provide them with varied solution so that they can provide results and answers that fit different types of people with different values.

David Bell
It’s tricky Dan Gray, right you’re saying just wondering I mean, I’m not an expert on half an expert on financial advice sector that and maybe Fraser can fill in a bit here but you know, I think advocate the advisors should know more about the financial literacy skills they clients and and I think it’s great idea to find more about the values but if these values are so nuanced, like the one on the exam on uranium you’re giving this was fascinating and the same with coal export. Yeah, because the alternative is exporting from Indonesia, which is dirty coal and, and things like that these days. Each of these little issues is really nuanced. And, yeah, it’s probably unrealistic to get a client across each of these issues. There’s a whole plethora of them. So how do we sort of get into a containable sort of conversation that an advisor can have with their clients is, is really the challenge I can see. And I don’t have any great insight into it or guidance on it.

Fraser Jack
Yeah, my thoughts on that are a lot around the idea of understanding a client’s values understands their drivers. And then and then once you understand your drivers, then they’ll obviously be more information and more things to talk about. But it often comes back down to the thing that that will remember or understand or 101 make a decision on, you know, understanding around, you know, whether it is a deep green or something like that, and then going okay, great. Well, that’s X amount of cars, my investment portfolios removed X amount of cars, or equivalent to off the road, being able to hang their head on something that’s quite simple. Like that is really interesting, because sometimes the amount of information can be just overwhelming.

Dan Miles
Yeah. Yeah, no, you’re right, I think we need to strike a balance between, because it is an incredibly complex and area with very, very diverse levels of nuances, as you’ve said, David, and so you want to generalize it to an extent, but not generalize it so much that, you know, it’s a one size fits all that doesn’t actually end up achieving what anybody was actually after? And I think we I think we’re getting there. And I think that’s that concept of different different people having different or different providers having different philosophies and abiding by them and, and standing by and saying, This is what we do, because it fits with you. Great, but if it doesn’t fit with you, yeah, there’s, there’s something else out there. But as you said, David, it also comes down to financial literacy, because, you know, clients can be have very strong values or very strong views around certain things. I mean, we’re largely talking about ESG here, but we can expand on it. But do they necessarily have the the the financial understanding or capacity to be able to make an educated decision? Because the values are something that they hold very personal, it’s very personalized, and it’s very psychological? And so, you know, can that be translated into a more logical framework? You know, I think there’s, there’s probably ways that it can be done, but it certainly is something that needs to be thought of. And I think the advisors that do think about it, and they don’t have to have the perfect solution. But if they’ve got some form of solution, they’re already miles ahead of the competition.

Fraser Jack
Yeah, I think I think values are definitely part of that. We talked about earlier that bias around dumb decision making. They’re definitely part of a goal setting process today. They’re originator in the motivator for goals. Devin, want to talk to you about bridging that gap between the you know, that emotional framework as well as the, you know, the logical framework when it comes to values, what do you thought,

David Bell
I think there’s probably a couple of framing words that help and that is a value based investment versus values based investment. Value Based investment is when you look at issues like ESG, particularly as risk factors. And sustainability is probably more a somatic piece and say, I think it’s the responsibility of any investment manager or any financial advisor to consider the risks to outcomes of any investment. So I can’t see how you can ignore Value Based Investing anymore. You’re not really doing your job if you’re not accounting for risks, which are, which may impact the outcome that is Based Investing is different. And this is where it gets difficult. And so what we’ve seen emerging in institutional world is breezeway nice sort of framework of how it can be applied. So you’ve got areas like impact investing, where you’re making dedicated investment decisions, which you’re going to have sought will impact, opportunistic investing, where you might be looking to participate in new technologies to participate in the investment opportunity. So think of your trees always have solar, everything like that, then you’ve got exclusions, and this is something that can be implemented. So in the Superfund industry, there’s a genuinely tobacco is excluded, and nuclear weapons are excluded from mandates, and so forth. And then finally, engagement strategies, which is what investors do when they’re engaging with companies, how they direct their proxy voting, and so forth. So they’re sort of the four main themes and the sort of I look at them the institutional world and think well, what could be applied by advisors themselves, and it’s probably it could be dedicated impact investing, there could be opportunistic investing, even through major identification, exclusions, I guess that could only come through in a managed account type environment. And then it’s the engagement piece, which probably difficult for advisors to get too involved in, I’d be guessing, would be my view on that. Yep.

Fraser Jack
I’m, I’m thinking that we’re sort of approaching the design and distribution type conversations. Now, Dan, is that where we’re heading with this?

Dan Miles
Yeah, yeah, yeah. Happy to happy to

Fraser Jack
tell us tell us about how this values based investing then can benefit advisors with their design and distribution conversations.

Dan Miles
I think that being able to sit down with the client and have conversations in regards to something such as an impact assessment, that allows them to determine what it is that they find that they find valuable, that they find close to heart, whether it’s their ethical and socially responsible considerations. Or there are things such as you know, whether it’s fees, or it’s just raw return results, what it is that’s important to them, there, there are solutions out there, and there are ways that people can go about doing things, you know, I’m actually a firm believer that, that the research is reasonably clear that impact investing in you know, even light green through dark green investing, and having an influence on CEOs and company management doesn’t necessarily have as great an impact as direct charitable investment. So, David, one of the things that you mentioned earlier was if our core was the first of the four points of impact investing, I believe it was, and but how can you translate those four into the advice realm, and, you know, charitable giving is one that’s quite interesting. And, you know, I can see products where, you know, the profits from the offerings that are being made, you know, they can be profit for purpose, they can they can be allocated to the charities that are aligned with the philosophy of what the product actually is, assuming that that’s, you know, as a consumer that that you have you believe in those values, and you believe that those are correct. And I, you know, I can tell you that, that there will be things like that before the end of this year, which I’m quite excited about.

Fraser Jack
Yeah, that’s really interesting isn’t just about term I can return. It’s about making a difference. Yeah. Gentlemen, thank you so much for being on this particular episode. We’re gonna probably wrap that up there. But we look forward to jumping in and catching you in the next episode when we start talking about risk profiling.

David Bell
Thanks for the great, thank you