Make sure they meet 3 E’s

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While the rules for personal finance may be straightforward, they are not always easy to implement—actions like saving for retirement or investing in the market require certain behavioral changes that are more easily said than implemented.

Dr. Daniel Crosby, a psychologist and chief behavioral officer at technology and advisory wealth solutions firm Orion, suggests that financial decisions in particular can be best made with someone else’s help. In this scenario, he says he’s looking for a financial advisor who provides support across three levels: education, environment, and encouragement.

Dr. Crosby’s reasoning is that individuals, especially investors, sometimes need multiple layers of intervention to influence their behaviour. “Financing is ‘simple but not easy,'” which can lead to a gap between knowing what to do and what we’re actually doing, he told Select. As a result, the counselor’s job is to educate, change the environment, and provide encouragement in relationships.

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When hiring a financial advisor, look for someone who provides support across all three categories

1. Education

More than you know, education entails knowing what you don’t know, or what Dr. Crosby calls “meta-knowledge.”

“It is not important that you know how to repair your car, but it is important that you know when your car needs repair and when to seek outside help,” he says. The same theory can be applied to your money. We may know the basics, but most importantly know when our finances need professional guidance.

As part of investor education, for example, a consultant can also help them better manage expectations, whether they are too optimistic or not optimistic enough. “It is difficult to get an investor to act appropriately when his expectations do not match reality, so education can provide a useful ‘base case’ here,” Dr. Crosby explains.

Suppose you are nervous about market volatility. An advisor can help provide context that shows that volatility and adequate returns can actually coexist. This simple intervention helps prevent any triggering of fear and preserves one’s investment during downturns, which is what experts generally suggest doing. While the market does not always rise, it is in the investor’s best interest to continue down the path. Investing is a long game and you are likely to benefit from continuing it over time.

“Education tells us what to do, helps us understand what to expect from markets and lets us know when to look for help abroad,” says Dr. Crosby.

Are you looking for help abroad? Those who have a brokerage account with a company like Charles Schwab or Fidelity may already have access to a financial planner. Robo-Advisor Betterment also allows users the option to pay for a one-time advisor consultation, which costs fees ranging from $299 to $399. Investors with $100,000 credits can upgrade to the Betterment premium plan, which provides unlimited access to real-world financial advisors for an annual fee of 0.40% of your balance.

2. Environment

Our behavior is highly dependent on our surrounding environment, which brings us to this next point about what to look for in a financial advisor. Dr. Crosby suggests that advisors can help with two environmental influences – the way we build our portfolios and the way we consume information – both of which have an impact on our financial or investment behaviour.

“Environmental factors are often more predictive of actual behavior than intent, which means we have to think about how we allocate our assets as well as our information system,” Dr. Crosby explains. “We have fairly consistent behavioral tendencies, but extreme conditions can cause us to behave in ways that may surprise us.”

The way we build our portfolios, or create the portfolio, is only as effective as how we interact with the market. “In short, the ideal sports wallet is actually best only as far as the customer can afford to ride,” says Dr. Crosby. He adds that some of the best performing funds in the recent past have had negative real returns for investors due to their tendency to get in and out of positions at precisely the wrong time.

The way we consume information, or information, includes the sources we turn to and how often. Constant monitoring of the markets, for example, is the number one investment mistake we hear from financial experts. Markets are constantly moving, and being in an environment where you’re trying to follow in real time can negatively affect your behavior, leading you to constantly check your investments or change them when it would be best to leave them alone for too long.

“The future is, on average, fairly average, and things worth posting are definitely deviations from the mean,” Dr. Crosby says. “By monitoring every point in the market, checking portfolios too frequently, or tuning into melodramatic news sources, clients can create an environment that is not conducive to calm and long-term thinking.”

3. Encouragement

All relationships in life should provide some form of encouragement, and the relationship you have with a financial advisor is no exception. “Encouragement from a counselor can have a positive and holistic effect, improving both returns and behavior with some discretion,” says Dr. Crosby.

Dr. points out. Crosby points to research suggesting that those who work with counselors do a much better job than their peers who “don’t advise,” even after taking a range of socioeconomic factors into account. According to the report he cites, those who have a long-term relationship, such as in 15 years or more, with an advisor have 2.73 times the wealth of DIY investors. He points out that this is likely due to a combination of higher returns – the study reports 1.5% per year – and decision support and behaviour. There is also evidence to suggest that working with a counselor positively impacts an individual’s quality of life on a large scale, which positively reflects a person’s happiness and marital communication.


Editorial note: The opinions, analyses, reviews or recommendations contained in this article are those of the editorial board alone, and have not been reviewed, approved or otherwise endorsed by any third party.

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