Episode 395: Charles Chaffin - The Psychology of Financial Planning

27:23But it's really important because if you've gone through that, especially if it's significant, it impacts your risk tolerance. It impacts everything. it impacts how you the trust level you are with your advisor. It's a big part of that. So that history, especially something that's so significant, has an impact for the rest of your life in a lot of cases with these big events, whether they're at a macro level like the depression or the Great Recession or something on the individual level like fraud. Past experiences can play such an important role in our beliefs with money, but are there any other areas that influence people's beliefs about money?

28:03Going back to, we've talked about environment a few minutes ago, you know, who you're around has a huge impact. If you are around people who are distrustful of rich people, and you've heard that for 20 years, and we have lots of data on this, that people who have heard for 20 years that rich people should not be trusted. And then suddenly, let's say they're an athlete and suddenly their bank account went from$6 to 60 million. They are so much more susceptible to financial enablement and fraud and all kinds of different things for lots of reasons. But for one of those reasons is because now they're on the other side.

28:46they're what has been talked about for 20 years. And I'm not, I don't want to oversimplify that because there's lots of reasons in financial literacy and some of these other things that we're talking about today. But when it comes to our past history, you started to become something that people have talked about for 20 years. It can have a huge impact on your behaviors going forward. So if that circle of who you're with is important. And I guess I'd also mention too, if you, past successes and failures can be critical too. So if you started a business and it failed miserably, it can have a huge impact on how you see money going forward.

29:21And actually one extreme or the other, quite frankly. But our financial history, when it comes to success and failure, can also play a role. Can you talk about how the beliefs that people form about money affect their financial decision making in the future? Yeah. I mean, it can make you lots of different things, right? It could make you money avoidant. It could impact how you see your risk. Again, one extreme or the other. One thing we haven't talked about is your financial self-efficacy, right? So your confidence when it comes to money. So going back to that example of someone who had a business failure, they could be at that level of really low financial self-efficacy, feeling like, I just can't do this.

30:02Or, you know, that they have this external, what we call external locus of control, meaning it's not coming from within, it's coming from beyond. I'm not meant to have money. My business failed. it's just not for me. I'm not going to get there. Well, that has a huge impact on your financial confidence. Now you're not prone to saving and investing. And by the way, those individuals that have that low level of financial confidence, the lowest level of financial self-efficacy, those are the people that a lot of cases advisors never even see. In some cases, in the States here, we have these data that show that in some cases, 70 % or more of widows fire the financial advisor that the husband was working with.

30:46Now, there's lots of reasons for that, but one of them is financial self-efficacy. It's confidence. Because you have somebody who says, I can't do this. I've never done this. I'm 75 years old and I'm not cut out for this. They do the opposite of what you would think a human would do. When I say they, I mean us as human. This is how we're all prone to do this. You would think people who have that low confidence are seeking as much information as they can to get better. They don't. It's the perfect storm. Those people with that low financial confidence, they're avoidant. And that's one of the reasons why they fire an advisor.

31:29And it creates all kinds of problems there. So we can fix that. And the best way to fix that is, I have a new book out on goals. And people always want to talk about thinking big. Thinking big is not the recipe for success. Think small. And so think about shorter time horizons and think about when you have a client that has that low financial confidence. You have that widow or widower who's in your office at maybe the worst point of their lives and they think they can't do this. they need wins. And that win might be a budget for the week or a budget for the month or some basic element of investing.

32:18And we can build confidence in people through wins. So when we think about that, we want to try to establish horizons that are much more manageable. And again, it goes back to that coaching mindset. And I coach advisors individually. And we talk about that all the time. You need to have shorter horizons. Get them a win and celebrate that win. You know, casinos are really good at that. Casinos are so, I mean, they're just brilliant about everything. There's a reason why you go into casinos and they all look so nice is because they have so much of our money. But they do a couple of things that are really good.

32:53Okay. The first thing they do when you walk into a casino, more often than not, you'll see pictures of people who have won like all over the casino, right? And this is probably not nice to say, but most of the time when you see those pictures, it's somebody wearing like a t-shirt. It's like all wrinkly. They got like a little barbecue sauce on the side. I mean, they don't look very good. Now, that's not because they couldn't find a better shirt or that they couldn't schedule a picture later. It's done by design. That's done so that somebody on vacation who's wearing flip-flops, walks into the casino and they see those pictures, right?

33:32And they say, that can be me. That can be me. I'm going to play because I want to be that person holding that ridiculously large check in that picture with the barbecue sauce on their t-shirt. The second thing they do, casinos do a really good job of, and this goes back to getting wins, is you're on a slot machine and you put a quarter in or whatever, penny to penny slots even, right? and you win a nickel and all the lights go off, right? As if you won a million dollars. That's by design, right? That's by design because, oh, I got to win. I got to keep playing. I got to keep playing. It keeps you engaged.

34:08So we can build that element of confidence by celebrating wins like the casino does with the slot machine. And we can also, we don't need to have barbecue sauce on our clients' T-shirts, but we can have that picture of success say, that can be you. You can get there in building people's confidence. Yeah, it's so interesting, the point you made about confidence. And on first thought, it seemed counterintuitive that the widow would avoid financial advice. You'd think that they would be the perfect candidate to speak with an advisor because, especially in the case where the spouse did a lot of that financial work and then they're left kind of uncertain about how to handle things.

34:49But actually, it makes a lot of sense when you think about it. And I draw the parallel to going to the gym, for example. It's usually the people that have the most confidence that are there all of the time, but the people that may need it the most kind of end up avoiding the gym. And I think there's, yeah, it's just really interesting when you unpack that. It's the case in everything. And it's certainly the case when it comes to financial planning. It's that case in fitness that you're talking about. It's that case in education. There's a huge community college in South Florida, and they have this amazing retention rate of students who are coming in needing extensive remediation.

35:28And the reason why they're so successful is they basically tell their incoming students and their current students, we will get you there. We will get you to success. We may have to remediate like crazy, but you can get there. And here's the path to do it. And so as we think about our relationship with clients. That's what needs to happen. That's what coaching is. It really is that partnership between the client and the advisor to overcome some of these biases, build that confidence so that individuals can say, yes, I can do this. So what are money scripts? Yeah. So my business partner, Brad Klontz, developed all these things.

36:06They got the Klontz money script inventory. There are unconscious beliefs about money, right? So they tend to form early in our lives, through our culture, through our family, and our experiences, our life experiences, I guess, are part of that. And they have a huge impact on everything that we've been talking about here, whether it's our behaviors or our decisions. He boils us down to the kind of four things. We could have people who are money avoidant. These are people who, for whatever reason, for some of the reasons we were talking about, right, they see money as bad or evil, or they see people as greedy or immoral, or they just don't feel like they can really be successful in that space.

36:44People who are kind of money worship, that money will solve their problems. There's never enough, right? And their self-worth is really aligned to money. Money status people, I've kind of already talked about them, right? Your net worth is kind of your self-worth, and money is really that measure of who you are and success. And then the vigilant people are basically people that are monitoring their money constantly. They're that client, right, who's checking their accounts all the time. They may be that client that even any remote little changes in elements of market volatility, they're emailing, they're questioning their plan all the time, could lead to some neurotic behavior on their part.

37:24So if we understand kind of where they're coming from, it's not about changing people. Again, it kind of goes back to what we've been talking about throughout this conversation, but we can help them identify your potential barriers that may get in the way of whatever goal you're trying to develop in the plan. And we know, we have tons of data that shows if we develop a plan and we have a sense of these clients, where they fit relative to these bunny scripts, and we work on this in MRI, we ask them basically find out what they are relative to the inventory without judgment, by the way. There's nothing about any of this is about judgment, right?

38:01So identifying who we are and helping individuals move forward. But if we can identify factors like this and say, okay, here's the plan. Here's the goal where we want to go. And let's identify three obstacles that are going to get in the way at some point on this journey. And your client says, well, impulse spending is an issue for me. This is an issue for me. That's an issue for me. Okay. So we identify that and maybe we adjust the plan a little bit to accommodate that. But more importantly, when those things come up, we don't do what a lot of people do and that is ditch the plan. It goes back to that external locus of control, right?

38:47Where we say, I'm not cut out for this. I can't do this. I'm not meant to have money. I'm not meant to retire. I can't do this. Instead, it's like, I knew this was coming. It's fine. Many of my coaching clients, the advisors are great using the analogy of the plane and turbulence, right? It's the best example. The pilot comes on ahead of time. We're flying to LA and I just had this on an overnight flight last night. The pilot says, we're going to have some turbulence about halfway through the flight. It's going to be a little shaky. I'll put the fastest seatbelt sign on, whatever. Okay, so we get in the plane.

39:24We're halfway through and it gets bumpy, right? What's the first thing you think about? Here it is. Your likelihood of panicking goes way down because you saw it coming. Now, I still, my first instinct is to look at the flight attendant. If they're not panicking, then we're good, right? But the reality is, I knew this was coming. So we're good. We've got the plan. We've accommodated that. We can move forward. Understanding those factors about who the client is and how those could manifest themselves into some hurdle or turbulence along the way can be critical for them in going forward. That makes a ton of sense for the client advisor relationship.

40:03Should people try and understand their own money scripts as well? Yes. If you can understand who you are, when it comes to anything, it can be helpful, right? It could just help you understand. And it's not easy to do. Okay, so just knowing it, I don't think clients would get upset with me saying this. People could go take this inventory. It's great. it's not a be-all end-all but it does help immensely right to know okay well i tend to be more money status i don't know that i want to be money status i see how that's gotten in the way of x y and z okay so it can be immensely helpful it try to kind of bringing in some rationality and maybe with some people it can say you know whether it's a client or an advisor saying you know what i'm gonna put a cushion on when i'm gonna pull the trigger here i'm gonna wait a day and then the next day oh no i don't want this anymore it can be helpful absolutely you mentioned the inventory just to be clear for listeners how can people go and understand their own money scripts like what is the inventory i guess is the question it's a series of cracks should know more about his inventories by business partner but if you google cons money script inventory you can find it you can take it you get your results back in minutes yeah it's easy to find on the web what are some of the common financial behaviors that can lead to bad outcomes bad spending bad investing when i say bad bad is anything that's inconsistent with helping somebody reach their goals and that goes back to what we talked about a while ago that we're not in the business of identifying good and bad whether it's what we do with mri or what advisors do with clients we're basically saying this either aligns or it doesn't i mean common things are obviously impulse spending.

41:44Anytime we bring emotion into investing, we got a problem. If we're avoidant of certain issues, that's never going to be good. Problems don't just go away magically. I think going back to that element of chasing, what we talked about when it comes to FOMO, that could be an issue. So for the consumers that are listening to this, what boils down to this is thinking about, okay, what's your goal? And everything that you do, every behavior following that goal either aligns with it or not. And if you could categorize that, if you need to have a little cushion in there because you want to have a little impulse spending or whatever it is, then factor for that.

42:21But aligning that, this is consistent with what I want, this isn't. And then on the investing side, I think it really does get into that element, particularly people that are on active investing, people that are doing that element of day trading. again, not good or bad, but understanding what is emotionally driven there and what's not is really, really important. Those behaviors are bad, detrimental for what I think are pretty obvious reasons. But we've also talked about biases and heuristics and beliefs and preconceptions or flashpoints. Presumably people don't always realize when they're making these mistakes, what can people do to recognize and mitigate them?

42:58I think it's probably a few things. I think, first of all, we kind of talked about this is be aware of your emotional triggers. So going back to the analogy of the cookies in my place here, what are the cookies that are getting in the way of your nutrition? So know what your emotional triggers are right there. We talk a lot in goal setting about if then statements. If this happens, then do this. It can be really, really critical. We have a plan for what we're going to do relative to that. Some of that is habit driven and it's impulse-driven, in a lot of cases, too, it's tied to other behaviors.

43:30So for example, if you have a problem, I'll go back to snacking. If you have a problem with snacking and you do most of your snacking watching television, maybe you need to think about watching less television, right? Because you're coupling those behaviors, those habits into two different things, which can be critical. We already talked earlier about being in charge of your environment. What in your environment is consistent with your goals? What in your environment is getting in the way of your goals? And that could be anything from maybe on Amazon, you don't have your credit card stored. That's the best example of frictionless behavior.

44:08So I'm going to make a commitment that I have too much impulse spending. So I'm going to take my credit card number out of all of these websites today. I'm going to do that. I'm going to make it harder for me to purchase things. So being in charge of your environment, which I think is really, really critical. We talked already, identifying those hurdles ahead of time can be really, really critical. And the last piece, I'll just reinforce that we already mentioned. You know, there's some people who, for lots of different reasons, feel like they are just at that level of no financial self-efficacy or even when it comes to nutrition or health.

44:46and I would reinforce to those folks this idea of maybe we don't need a time horizon to get a win for a month maybe we need to win today and sometimes those changes evolve into making your bed when you get up in the morning getting a win and building on that win and thinking so I think those things at a general level can help people kind of mitigate those behaviors that again aren't good or bad, but they're just getting in the way of where people want to go. Something that jumped out of me as you're talking through that, and we're always super careful not to push the role of advisors because a lot of people who listen are do-it-yourself investors, and I'm sure they're doing a great job.

45:27But a lot of those areas are places where getting an outside perspective, which you mentioned earlier, seems like it could be really valuable. Absolutely. It's exactly right. I mean, there are lots of people that are listening that are active investors and are very successful at it. But having that element of that external person that helps mitigate our rationality or irrationality can be really, really helpful, right? And having that is so different than, you know, when it comes to relationships, you have that friend that gives that advice. They're the rational party relative that they can provide that advice saying, is this makes sense and whatnot.

46:02And by the way, that friend that gives that relationship advice, their relationship life could be a mess, but they give the best advice. Usually the reason why that is is because they have the irrationality when it comes to their own behavior, right? They have all the impulses and all the other things that they're bringing. They understand at a basic level elements of a relationship so they can give that good advice. Not that this is a relationship advice podcast, but the outside source could be helpful to bring rationality to what otherwise could be irrational. I started working with a personal trainer over the last few months.

46:36I've been an athlete my whole life and I know how to go to the gym, but I've found it really helpful to have a program designed for me and to have that accountability layer. Something I found really interesting talking to this guy who's also a lifelong athlete, but he's very well credentialed in weight training. He has someone else design his programs for him. And his comment to me was that if I do my own programs, I'm only going to put exercises that I like into the program. But when someone else does it for me, they'll put in the exercises that are best for me achieving my goal. is not just what I'm going to enjoy the most.

47:05I thought that was a really interesting perspective from a totally different discipline. It's totally true. I mean, and that's the case in lots of different areas, whether it's training, you know, musicians are like that. There's great studies that look at musicians who are professional musicians are studying to be professional musicians. And if they allocate five hours in a practice room, trying to become a better singer or piano player or whatever it might be, they tend to practice the things that they're already good at. They're impressing themselves. It's easier. They're not pushing their range or dexterity or whatever it might be to that point, right?

47:41And so having that outside person say, let's identify that. And by the way, that gets into goal setting where, okay, that's where you want to be. You want to be at 10, whatever that might be. Or say you want to be at 100 pounds, deadlifting or whatever it might be. Okay. And right now you're at 70. Then the real focus is the delta of 30 pounds. And that's what an outside perspective could help you on. I don't need to think about 100. You should not be picking up 100 pounds if you're picking up 70. Maybe you need to pick up 75. But it's all about that delta, the space between where you are and where you want to be.

48:17So what role does identity play in goal setting? A lot. I mean, so we are far more successful and goals are more sustainable. If we see a goal as kind of part of our identity. And our identity shapes really meaning. So it shapes what we see as meaningful as opposed to what's expected. You think about a lot of people that climb a lot of ladders, corporate ladders, that they climb that ladder because it's the next rung up. And maybe there's some extrinsic motivation, right? More money, more status, and that's great. But it's actually coming from outside as opposed to what's meaningful to them. So if we have goals that are outside of our identity, then we become kind of disengaged.

49:04We put them off. We say, well, I don't need to do that. Or we just quit them altogether. So we can be far more motivated and resilient if we see something tied to our identity. If we want to go into something new, then that's where we get into shorter time horizons and some of those other things. But our identity is really, really important. So if you have a client who sees themselves as a provider or a mentor, then goals that are kind of framed in that way, right? They're framed as providing security and guidance. Then they're going to be like, okay, I want to do that as opposed to like maximizing a return.

49:39I have that mindset as a provider. I need to make sure my goals align it. That's what I want to be. I want to be that provider for my family. I'm not thinking about maximizing. I'm going to align my behaviors towards being that provider and providing security. So identity is a critical part of that. And our environment, of course, plays a huge part in that too. It may be self-evident from the conversation so far, and you have mentioned goals a few times, but can you talk about why setting goals is important? Setting goals, it aligns our behaviors. Where do we want to go is the first step relative to any one facet of our lives.

50:14So if we say this is where our endpoint needs to be, every behavior after that, if we're committed to that, if we're committed to being at that point at the end of the path, then every step we take either is, again, going back to what we've been talking about here, is either consistent with that or inconsistent with that. And there's only so many resources that we have to dedicate it to. Otherwise, we're kind of shifting mindlessly. We're not really focusing. We're kind of that boat that's just adrift in the ocean, and the winds are kind of taking us where we want to go. So our goals help align our behaviors.

50:48They also motivate us in the sense of that element of progress is a huge motivator in and of itself for us. So if we have an endpoint in mind, we're now motivated to kind of achieve that. We're wired actually neurologically to do that. So it is really behavior alignment and motivation that are essential when it comes to goals. You know, it's funny because I come from an engineering background and we have a different reason for why goals are important. But I just think that the combination of both the technical aspects of solving goals and setting your objectives and also the behavioral side of things just really emphasizes why setting goals is so important.

51:27We're not really wired for... So in this new book I have out, we talked about I beat up pretty hard on retirement. One of the reasons why is because the retirement data, our health, whether it's physical health or mental health, just goes off a cliff. when we retire. Well, why is that? Well, the reason why, and it's apples to apples comparison, if people age, similar health background and whatnot, that people who retire tend to have this huge decline. And a lot of that really ties in this idea of how we're neurologically wired. We're wired for progress. We get that shot of dopamine when we get closer to achieving a goal.

52:07when we get closer to, oh, we made a major step today. Yes, we don't get that dopamine when we're sitting back thinking about what we did a year ago. Now, we can be proud of it. We can look at our trophy case, so we can look at the plaques on our wall or look at our bank account. And I'm not dismissing those things, but that's not what gives us purpose. What gives us purpose and what gives us that shot of dopamine is really progress. And so if we can do anything for clients or even ourselves that gives us the opportunity for progress, we're going to be far happier, far more fulfilled in what we're doing.

52:48So goal setting is super important. How can people think through setting goals that align with their values and their long-term vision? I would think about a couple of different ways. So we can look at goals separating, let's separate two different types of goals. Let's look at extrinsic goals that we already talked about and intrinsic goals. Extrinsic goals are money and things, the material elements. Intrinsic goals are a good rule of thumb for an intrinsic goal or the things you do when nobody else is looking. You do them for the sake of doing, you want to do them, right? You do it for the love of doing them.

53:22Neither is good or bad necessarily, but we do need to have a cocktail of both when it comes to goal study, particularly if we're an advisor working with a client, but even for consumers out there. We know that financial plans that have intrinsic goals mixed in are far more sticky than those that are not. We know that clients are engaging their advisors more, having more plans developed, achieving progress on those plans when they have both of those things. And that could be as basic as renaming an account that could say education account and changing the name of it to the name of the child. So this is education it is.

54:03Now I'm saving money for Naomi as opposed to just education. But that intrinsic element is really, really important. and we can be far more perseverant when we have both of those things. Again, it kind of goes back to how we're wired and what we're really looking for as individuals. And we basically have three things that as human beings, we all really, really crave. And that is we want to be competent. We want to be able to do the things that we need to do to sustain. We want to be autonomous. We We want to be able to make decisions over our well-being, in many cases, our environment. And we want to be connected.

54:44So we want to be part of something bigger than ourselves. And that could be any number of things and not necessarily just a romantic relationship. Be part of our community, part of a church, synagogue or mosque or something like that. Having all three of those things is really critical. And for your listeners out there, what I'm talking about is something called self-determination theory. Those things are what drives us. If we have those three things, we're good. And some of those are extrinsic and material, because we got paid for these things, capitalism, right? And then a lot of those things are intrinsic.

55:21They don't come with money. When those are out of whack, that's when we get into, not only do we get into elements of individuals resolve towards achieving goals, we become much more susceptible to things like FOMO. There's a huge connection between FOMO and this self-determination theory that I'm talking about, that if we're not aligned in these three areas, we tend to be on social media more, seeing what other people were doing and say, okay, why isn't that me? And now we're chasing. We're chasing returns. We're chasing extrinsic rewards like likes on Instagram or Facebook or whatever it might be.

56:03So having that cocktail of things is really, really critical. Now, for advisors, that's hard to get to when it comes to talking to the client. Now, MRI helps with that. We ask about financial FOMO. We ask about general FOMO. We call general FOMO basically life FOMO. But it really comes down to, for an advisor, beyond MRI is specificity. So being specific with someone about what makes them tick is going to get you the answer that you want, as opposed to something that's general, but it's not going to get a client sizzling hot about their plan, which is what you want to do. You want to get them sizzling hot, say, this is the tool that's going to get me to the goals that I want as a human being.

56:51And so, you know, one thing relative to that is specificity is thinking about retirement. So lots of advisors say to clients, what do you want your retirement to look like? And, you know, people say, well, you know, they've seen a bunch of commercials with people with gray hair walking on the beach, these vineyards that they all have. I don't know how many people could all have these vineyards, but they always seem to have a vineyard and they're smiling and happy and whatnot. So they kind of regurgitate that. That's what I see. And in a lot of cases, they've regurgitated that because they hadn't really thought about it themselves.

57:27So you don't get a good answer. You get a good answer when you say, so your retirement, talk to me about Tuesday morning at 10 o 'clock during your retirement? What are you going to be doing? What do you want to be doing? Who's going to be with you? Where's it at? And what kind of impact are you looking for? Now we're getting somewhere, right? Now we're thinking about things that maybe we hadn't thought about. Still hard questions, but there's specificity to it. And now as an advisor, I'm now bringing in the extrinsic because I got to pay for wherever if their goal is to have that vineyard it's going to cost money but I'm bringing in the intrinsic too and now I'm saying that's what I want let's build a plan that's going to get that client there how do you know either as an individual or maybe as an advisor working with a client too how do you know when it's time to quit on a goal yeah we don't talk about you know I wrote about quitting it's amazing in the book Look, I have more people talking about quitting, that chapter on quitting.

58:34It kind of surprises me. I think the biggest element, there's really two pieces to it. So the first element is, is the goal that you have still aligned with what your identity is? And that's a hard question for some people to answer. It takes some time to get there, but is this really what it is that you want to be doing? I think the second piece is probably the more prevalent element is sunk cost fallacy, talking about biases, right? I mean, you basically say, well, you know, I'm doing this because I've been doing it for three years. If I quit now, if I put three years into this, well, okay, but that's not a reason to continue on.

59:14I do goal setting for organizations. And this is what they talk about all the time. It is like poison, right? We get into this, well, we put all this energy into this. And in reality, you know what? It's time to walk away. If it's not getting anywhere, where it's not aligned with your identity, or it's just an outdated goal and you're holding on to it because of some costs. And by the way, relationships are the worst for that. Talk about making this a relationship podcast, but people, I mean, we've been together for four years and I've been putting up with their garbage for four years. I can't walk away now.

59:46Well, what are you talking about? You're basing it on a sunk cost as opposed to what it is going forward. so if you feel like that is driving your persistence is what you've put into it in the past it is probably at least worth revisiting putting that goal so far we've talked a lot about financial planning psychology and goal setting two areas that you have a ton of expertise in but you also have the mri product and that's dealing with risk profiling so i'd like to get into that a little bit more. What is financial risk tolerance? Financial risk tolerance is our emotional behavioral response to uncertainty.

1:00:30It's kind of boiling it down to a basic level. And, you know, how willing are we to endure some element of volatility or even short-term loss for a potential longer-term gain, right? It's not just that, you know, in a lot of cases, a score is important. And we have a score of MRI and lots of products do. But it's really, really beyond that, right? It's really getting into our past. For example, if we want to know how somebody reacts to something, how they're going to react to something in the future, the best thing to do is ask, well, how did they react to it before in the same circumstance? That's usually a good predictor.

1:01:07But at the basic level, it's thinking about, for your listeners out there that are consumers, you know, it really is our willingness to take on loss and how we deal with uncertainty. In a lot of cases, uncertainty is a little more challenging than taking on loss. How does risk tolerance relate to setting and achieving long-term financial goals? If we have a misalignment when it comes to our financial plan and our investment portfolio, it's going to cause a lot of stress. The client may just abandon the plan altogether, right? And so we know kind of what we were talking about before. Sure. If we have proper alignment, then during that volatility, that's where that goes back to the, we're talking about turbulence, right?

1:01:49We plan for this. We do this with coming. We're fine. We're set based upon your risk tolerance. We've got the portfolio exactly as it needs to be for you. There's no reason to panic. We're fine going forward. And so if we've got somebody who's conservative, but they're in something a little bit more volatile, it's a mismatch in their behaviors. They're going to either walk away or they're going to ghost their advisor. How well do people tend to understand their own risk tolerance?

1:02:40find their true tolerance in downturns. We tend to have that willingness to take on more risk than we should when the market's up. And advisors everywhere talk about that, right? Oh, this is going to go on forever, right? They're going to tie in biases, right? It's a recency bias. And that goes back to the full circle conversation here. That's where the advisor is just so critical in not only being that rationality element of saying, well, remember that the market goes through these corrections or, you know, five out of six years or whatever the data people want to talk about as far as growth goes, there's going to be changes.

1:03:15So let's not get too confident here. And so people tend to exaggerate them, but more often than not, when the market is really doing well, they think it's going to go on forever. Assuming that someone has established their appropriate risk tolerance, how stable is that trade over time? It's relatively stable as we think about this idea of an attitude versus an emotion. So an attitude is much more stable, an emotion is not. Emotions happen quickly, and then they're very ephemeral, and they kind of disappear. So the biggest element to change is a life event. I would say that's probably the biggest personal life event.

1:03:53So for example, if you have your first child, now you're going back to that idea of a provider. I gave that example earlier. Well, now your risk tolerance may change. Well, I'm responsible now. We're a family. It's not just me. I can't just be taking on. I don't want to take on as much risk because I have a different life situation. Obviously, when it comes to the market, too, that can change people's risk tolerance. If you've been burned, then you're going to have a change in that element of risk tolerance, too. So really, life events play a critical part in it kind of being that element of altering.

1:04:27So that's why, you know, we advise firms just when it comes to MRI. And if you've been doing RTQ, you should be giving out our comfort with risk profile every six months if you can. And it's a great opportunity to just re-engage. It's a great precipitator of dialogue because what we do with MRI, we give the score, but we provide lots of, the advisor can look at this and say, okay, there's other things relative to them just being conservative that are opportunities for conversation and maybe opportunities for more investment, you know, higher wallet share, but just a deeper relationship. It's a great excuse to really re-engage, but it is important because life events and, you know, macro events do change people's risk, comfort with risk.

1:05:12That's really interesting. Brayden, I'm taking notes here. We should be doing the seven question risk tolerance questionnaire every six months, And then we'll have like a time series of risk profile for each client. We can even overlay that on other stuff that's happening in the world or was happening in the world at the time. That's a really cool idea. Yeah. And even like firms that we have firms that we work with that do either the prude processing between October and December. Oh, okay. There you go. Give it out. And most people want to, they want to see their score and it's great opportunity to talk through it with them.

1:05:41It just makes all the sense in the world. When we're developing our own risk profiling tool before we partnered with MRI, one of the biggest challenges for us was figuring out how do we combine risk scores of a couple that have materially different profiles. So what are your thoughts on that? What's the best way to handle a scenario when a couple has two different risk profiles? We've developed some things for specific firms that look at that. They can get the scores of both. But I mean, it's a challenge, right? Because you've got tension. If there's differences in the risk tolerance in two individuals, more often than not, I mean, that kind of gets in the side that gets into, can get in some real power struggles or even some avoidance of one member of the couple.

1:06:27So I think the biggest thing of that beyond using MRI is dialogue. So there needs to be communication and some real shared frameworks regarding steps going forward. If there is a huge delta between the risk tolerances in the couple. But having those conversations can be absolutely critical. And even kind of walking through, going back to that idea of ifs then, right? Okay, well, if there is a downturn, here's what we're looking at there. And sometimes that, making that abstract concrete can be really, really helpful. If the advisor is able to make some sort of, let's say, resolution to that in terms of going forward, even when there's a huge delta and risk tolerances, when there is that turbulence, there's a lesser likelihood of a power struggle or a problem because it's already been out in the open.

1:07:17It's already been discussed. There's a higher likelihood that they're going to move forward, even with that difference in risk tolerance. So we're talking about risk tolerance and risk tolerance questionnaires. There's different ways to evaluate this. Can you talk about the differences between psychometric, which is what MRI is, and revealed preference risk questionnaires? So we look at it from, and not saying anything about our competitors, but we really look at integration of many of those elements that are part of the financial psychology that we have data and that we've worked on. It brings in the beliefs and emotions and behaviors of an individual beyond just looking at what individuals have stated as a revealed preference, right?

1:08:00And knowing exactly, okay, we want to give that score so that we can map a portfolio and we do that. As I mentioned earlier, we want to be able to find out, okay, well, in similar situations, how did you respond? Because that's going to be the ultimate predictor. But just basically what people say, people say lots of things. And that's all of us. I say lots of things. I mean, that's just how we're wired as humans. So if we can really tie in the behavioral element, then now we've got a much higher likelihood of getting a score and a mapping that's going to be far more accurate and consistent for the client to stay engaged.

1:08:38So of those two types, the psychometric and the revealed preference risk questionnaire, how do we know which one is better? Well, so psychometric tools, they're assessing like their attitudes and the beliefs, kind of that emotional element, right? Right. Revealed preference, it infers tolerance from past or more often than not hypothetical behaviors. So psychometrically, we're looking at kind of how risk, I guess you could say how risk feels and revealed preference would be kind of how risk is acted upon, if that makes sense. But if you don't have a combination and bring in all the behavioral pieces, then from our perspective, anyway, it's not exactly complete in terms of giving an accurate picture of what is that not just risk tolerance, but that comfort with risk that ties in what an individual is able to and what they're comfortable with taking on relative to risk.

1:09:30I will give a shout out. Your MRI co-founder, John Grable, who does have a 2019 paper where they designed a test to determine which of revealed preference in psychometric actually explains people's households' risk taking behavior better. And they find in that study that psychometric does a much better job. It's highly correlated with actual equity ownership of the people in the sample, and the revealed preference scores were unrelated to equity ownership. So it's not just an opinion you're sharing. It's a real evidence-based thing that this type of questionnaire is, in fact, better, at least in that study it was.

1:10:02And that's his work that's part of MRI. And it's critical bringing that into this space. And MRI has been running for, we've been running for like a year now. And we're just thrilled with the response so far because of his work and bringing it, making it so strong. Both your work, right? It's John's work on that, on the RTQ piece and the risk tolerance questionnaire piece, but you combine that with the psychology as we've been talking about it. It really creates this full picture, which is why we're excited about using it. I don't want you to throw your competitors under the bus. You already mentioned not wanting to do that, but you've obviously built this tool because you thought there was a gap in the market.

1:10:34Can you talk about where common risk tolerance assessments fall short? What we hear from firms is it's an exercise that ends up in a file on, you know, a client's file, and it's not really revisited. It's not the best use of everyone's time. It's something you got to you have to check that box from a regulatory perspective. And it doesn't provide the opportunities that we were just talking about to have that deeper relationship with the client and understand the client better. And yes, check the box from a regulatory perspective. I think that some RTQs seem to be overly simplistic and are decontextualized.

1:11:16You get into these hypotheticals. Again, it's not really relevant. And perhaps more than that, bringing in the side of the street and the work that I do, it ignores the emotions and the beliefs and the narrative that is absolutely critical in knowing your client. and that element of assuming that stability, you know, doesn't even exist in some cases. So I think that, you know, our approach has been to think about comfort with risk holistically, like we are with all the elements of psychology. And Grable is the person that brings that into the risk space and then provides, you know, we basically in our feedback, which you all have seen is we basically develop it so that an advisor can look at that for 90 seconds before a meeting and say, I got it.

1:12:07Here's the score. Here's the yellow, reds and greens. Here's the things to think about. Here's what we do relative to mapping. And if a firm has 20 portfolios to map or nine, whatever it is, fine, we can do that. But they can move forward in a systematic way and eliminate the guesswork and perhaps more importantly, know where to go in the relationship. When you have a conversation your clients don't have all the time in the world neither do you as an advisor and you could go a million different directions with a conversation this basically says okay here's the reds and reds aren't good or bad reds are priorities this is probably a priority item for you to talk about with your client right now and get to it it's going to make the most of your time most of all of you to both the client and the advisor's time can you go into a little bit more detail about that.

1:12:55You touched on what the advisor gets to see, but what specifically does the output of the MRI questionnaire tell us? So it is the use case of the client takes it, and then that output relative to all these different areas we talked about. So everything from financial confidence to history of fraud in the family to FOMO, to overconfidence and biases, all those different things, shoots out a pretty succinct overview that goes to the advisor specific to that client saying, here's what we saw. This client has high levels of FOMO, or they have low levels of financial confidence. Here's what to think about relative to that.

1:13:34And it's written in a way, kind of going back to what we talked about a while ago, it's written in a way that, first of all, is not as if it was written by three PhDs, but very, very basic. So an advisor could read it very quickly. But more importantly, it's written without judgment. So we do have firms that want their clients to see it. And that's not a problem. They can see it. The language in there says your client is this. It doesn't say the individual. Now, some firms are customizing to change that, but that's okay. We wrote it in a way that if the client saw this, they wouldn't be offended.

1:14:11They wouldn't feel judged and whatnot. And then based upon that, there's the opportunity in that discovery meeting. Here are the three things that we want to start with in this conversation relative to the plan and let's get to it. And, you know, in our first year, what we're seeing is it is incredibly helpful, not only for existing clients, but on that discovery and converting prospects, because you know where to go with the conversation. You're going to talk about things that you're sure are relevant to that client. It makes a ton of sense from the perspective of the advisor and improving the quality of that relationship.

1:14:43From the perspective of the end investor, the client, can you talk about how the full set of information provided by MRI helps someone make better financial decisions? It kind of goes back to what we were talking about is understanding yourself better. We all have elements of irrational behavior. We all have elements of our history that helps us and gets in the way of our goals. So if we understand that better, then it goes back to altering our environment, altering our behaviors to reach our goals, all those different things. So for individuals, and we're seeing this amongst a lot of firms that working on that consumer facing element of MRI, we think there's an opportunity there.

1:15:25That is a critical piece for individuals to set better goals because of their financial confidence or their high levels of FOMO or whatever it might be. That's super insightful, Charles. This has been great. Last question. How do you define success in your life? In my life or life in general? Your life. I think at a 30 ,000 foot level, if you want your life to matter, then everything you do has to matter. And mattering means that it's beyond just impulsive behaviors. If that's what you want, If you want to satisfy impulsive desires, that's, there's, again, there's no good or bad. I'm not striving judgment to that.

1:16:09But if you want there to be meaning, you want to have some element of impact, which is important to me, then you want to have alignment. You want to have alignment of your environment. You want to have alignment of the people around you. You want to have alignment of your behaviors that are consistent with that. And if that's a real issue for people that are listening to this saying, I'm not doing that, then take stock. Take that inventory. What is getting in the way? And don't beat up on yourself and say it's because you have no willpower or because you're not meant for it. Be objective about the environments that you're in and adjust if they're not working for you.

1:16:53And that goes to even if your goal is to satisfy impulsive desires. Fine, then have an environment that's conducive to that. But to me, I think that element of having meaning and purpose is important. I think that kind of going back to that retirement piece, I don't think that we talk enough about the gift of people relying on you. When you have someone counting on you, whether they're counting on you for food and shelter, or they're counting on you for support, counting on you for love, counting on you for just an ear to listen, that is actually an incredible gift that not only you're giving that person, but you're getting.

1:17:35I always feel sorry for people who don't have that, that they don't have somebody relying on them for something. So to me, that goes back to that idea of impact. And I think tying in to the money piece, this is a financial conversation. The money is a tool to get there, right? And that's where the extrinsic and intrinsic, the extrinsic is the fuel to get to what the real meaning is, which is really the intrinsic. It's a great answer. Thanks, Charles. This has been a great conversation. We really appreciate you coming on the podcast. Yeah, thanks for having me.

1:18:15Hey, everyone. It's producer Matt. Thank you so much for tuning in to this week's episode. Before we sign off, here's the disclaimer you've been waiting for. Portfolio management and brokerage services in Canada are offered exclusively by PWL Capital, which is regulated by the Canadian Investment Regulatory Organization and is a member of the Canadian Investor Protection Fund. Investment advisory services in the United States of America are offered exclusively by One Digital Investment Advisors, LLC. One Digital and PWL Capital are affiliated entities, and they mostly get on really well with each other.

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