Steve Seid:
And welcome to The Whole Truth in the Bay Area, California. I am Steve Seid.
Kurt Dupuis:
And from Atlanta, Georgia, I'm Kurt Dupuis.
Steve Seid:
How are you doing, my friend?
Kurt Dupuis:
I'm doing well. I'm excited about this one.
Steve Seid:
New year, 2021. You're excited about the episode and the year or the year?
Kurt Dupuis:
Mostly of the episode. I mean, we're still looking down the barrel of a challenging '21. But I'm trying to be optimistic about it.
Steve Seid:
I feel good about '21. I think it's going to be a big year. I think the economy is going to come roaring back. This is going to be a fun episode. So we have Ben Alge on, which he’s going to do our behavioral finance, second edition, which Kurt will-
Kurt Dupuis:
Is he our first recurring guest now?
Steve Seid:
He is. Welcome back, Ben. I think in the first time we had Ben on, we talked about, "Hey, get used to Ben." And you should because Ben is great.
Kurt Dupuis:
He's a force. He's a power.
Steve Seid:
He did a great job.
Kurt Dupuis:
And he's Seid 2.0. So I always love that aspect too.
Steve Seid:
I don't know how to ever respond to that. I guess it depends on if 2.0 is the better version.
Kurt Dupuis:
Inconclusive.
Steve Seid:
Inconclusive. Okay. So we're going to do that. I also want to get into a study that we did with our community. Thank you to everyone who participated. We're going to do a lot of this type of work where we want to get insights from you all.
Kurt Dupuis:
That was fun, too.
Steve Seid:
Yeah. We just came up with a series of questions that we asked about the pandemic. This was driven by someone in our community. He's like, "Hey, I want to hear what my peers are doing. So let's survey."
Kurt Dupuis:
We're not in the same office. We can't sit around the watercooler and talk about what we're doing. So I think it was really helpful that we're filling the gap that people weren't able to do naturally.
Steve Seid:
I'm going to throw some questions at Kurt to see if he can guess some of the responses. The four questions that we asked were these. What have you done during this time that has worked well reflecting on this work at home environment? What hasn't worked well? What would you do differently? And will your business change when things normalize? We ask those four questions and let people give us answers. Okay. So you ready for me to throw some questions your way, Kurt?
Kurt Dupuis:
I've got my batting gloves on. Throw some pitches. Let's go.
Steve Seid:
There was an overwhelming response to this question and I'm wondering if you can guess what it was. Overall, the teams that we asked, were they happy with the year? Did they feel good about 2020 from a business perspective?
Kurt Dupuis:
I think I'm going to say no. I think people faced a lot of challenges. And I think there were certain teams, high performing teams continued to be high performing. But I think there might have been some that this was a really big shock to them. It took them awhile to get their sea legs under them in a pandemic world. Is that right?
Steve Seid:
So it could be that the people that listen to this podcast in our community just happened to be high level people. But the answer was actually, yes. The bulk of people that responded to the survey said, "Hey, it was a challenge but a lot of really good things happened this year." We'll get into the specifics but I think, overall, people felt like kind of we do. We were a little bit blessed. It was such a challenging year overall, and if we look at how we did amidst that, we feel pretty good about how the year went. So I'll give you a multiple choice question. Did 25% of the respondents talk about proactive client outreach as being a key part of why the year was good? Did 50% say that or did 75% say that?
Kurt Dupuis:
Yeah. It's definitely over 50%. I just don't know if it's 75. I'm going to go 75 though.
Steve Seid:
You are correct. So you're one for two. Came up a lot. When this thing happened, we mobilized, we really got a plan for reaching out to our clients and that worked really, really well. You got the sense that, "Hey, we've been at this party before. Like '08, '09 is still sort of fresh in everyone's mind. So it probably was easier this time even though that-
Kurt Dupuis:
Because it was so quick, the down and the up were so quick?
Steve Seid:
Yeah. But also people realize like, hey, after '08 and '09 happened and they saw what happened with the market, some of them even said like, "Oh, our clients were ready for this. Is it time to put money to work?" That's not to say people didn't struggle. Especially when everything was shutting down, there was panic. But I do feel like some of the clients felt like, "Yeah. I've seen this game before and it's an opportunity to make some money."
Kurt Dupuis:
Well, my question is then, if that was such a rewarding experience this year in a year of plenty of not rewarding experiences, what do you take in 2021 and going forward? Right? We hammer almost ad nauseum service, service, service, service. Maybe there's something to that. Maybe talking to your clients a lot, there's something to that. And over-communicating and thinking of creative ways to do that, maybe there's something to all that.
Steve Seid:
Turns out I agree with you, Kurt. Turns out I agree with you.
Kurt Dupuis:
Shocker.
Steve Seid:
Truthfully, of the 25%, there was a lot of, "Listen, our book had too many households as it was. We didn't really have this locked in. So I think you're exactly right. People generally felt good about technology, but it also exposed some of the weaknesses of technology.
Kurt Dupuis:
That makes sense.
Steve Seid:
There was some bad Zoom calls where people just said, "This didn't work that well in these situations." We know when things go back to normal that the use of technology is going to be a more integral part of what people do. They probably will use Zoom. But they also realize like there's a point where technology just doesn't-
Kurt Dupuis:
When appropriate.
Steve Seid:
That's right. That's right.
Kurt Dupuis:
Well, one of the challenges that I faced is Zooms replacing just a phone call. Do we have to schedule a Zoom with cameras on? We're just talking, can we just talk on the phone? Some people text things that should be emails because they're like four pages long. It's like, "Just send me an email. I don't need a four-page text." So just knowing the message and then making the technology application appropriate, I think we all learned a lot of lessons with that in 2020.
Steve Seid:
All right. Kurt, so I'm going to give you a multiple choice. All of these three answers came up as potential challenges, but out of these three, what was the biggest challenge? The one that came up most often? The first one is personal productivity, the second was managing team members, the third was the investment environment and navigating through?
Kurt Dupuis:
Two. Managing team members.
Steve Seid:
You got that easy? How did you know that?
Kurt Dupuis:
I mean, I've got the results of the study but also that-
Steve Seid:
So you cheated, is what you're saying? Yeah. When we do these studies, one of the things I want to take away is like what can we work on on behalf of the community? And that's one of them. I think we need to dig into how to manage team members remotely, because it's not that this will be the norm forever, I pray, but there's going to be more of this. So can we do something to help people because people have really struggled with that?
Kurt Dupuis:
That's interesting because I think mine might have been the first one, personal productivity. And when you sit in your office and you can focus on everything, what do you hone in focus on especially when there's virtual schooling and kids in the background and whatever? That's probably my biggest challenge.
Steve Seid:
So let me ask you a personal question. Through the pandemic, did you find yourself exercising more and eating better or the opposite?
Kurt Dupuis:
Opposite.
Steve Seid:
You were in that camp?
Kurt Dupuis:
Yeah. Yeah. But it comes in fits and starts. I mean, I'm currently on a multi-week away from the gym trend. But I had some good weeks in there as well. But I'm also less careful about what I eat and drink.
Steve Seid:
I exercise a whole lot more during it because I didn't have to do those commutes. As a wholesaler, when you get in the car and you drive someplace and you spend all day and then you got to drive home, and you get in at whatever time you get in, to then start have to go working out is like the hardest thing for me to do. To get myself out the door at 6:00 p.m. after a long day is hard. Whereas I felt that I didn't have to do the commutes and so I could spend an hour exercising. So I was surprised then that a lot of... I won't say a lot, maybe 25%, 30% of respondents were like you where they're just like, "I just ate everything in sight and didn't exercise." Which was kind of interesting. I think the pandemic or maybe sitting at home had the adverse effect. That was kind of interesting to me.
Kurt Dupuis:
I posted this poll at the very beginning of the pandemic. I was curious, what course Americans would find themselves on? Are they going to be fatter or skinnier after this pandemic? It was 50/50 honestly, with where people were at.
Steve Seid:
Yeah. That's interesting. Business development, did you find that most people found it a good year? That most people found it a bad year or that it was a mixed bag?
Kurt Dupuis:
So I think there's going to be like self-selection bias, if that's a thing, because the people I talk to most frequently have been crushing it. So that's what's fresh in my mind. But I'm sure there's a big swath of people that did not find this particularly fertile times for prospecting.
Steve Seid:
It was a mixed bag. You're right. Yeah. There were definitely teams that have cleaned up because it was that catalyst for change, but there were also those that struggled to generate and have meetings and new business. So that was a mixed bag.
Kurt Dupuis:
I think the the differentiator is the people that had the marketing infrastructure before versus people that just kind of noodle around with different ideas. I think that was one of the bigger correlations of success. I mean, one lady that I've talked to has raised like 40, 50 million by really doing nothing differently except she's just getting all these referrals from the infrastructure she already had. Because money was in motion, people were nervous. She's really good. But people that didn't have that infrastructure or they just kind of limp into various marketing strategies, I think found materially less success.
Steve Seid:
Yeah. And that's how I felt about my own business, honestly. I felt very fortunate that I've been doing this for a long time because just going deep with the community of people that we operate with, I think that's what I-
Kurt Dupuis:
Because you had to go deeper versus wider. From a wholesaling perspective in 2020.
Steve Seid:
That's right. Okay, good. So I'll leave with two things and then I'll let you introduce Ben. The first thing being what I saw, some of the top teams did. So these are the teams that were like kind of crushing it and had a really, really good year. There were three things that jumped out to me. The first was, they used this as an opportunity to solidify and optimized, whatever word you want to use, their processes. So there were folks that are like, "Hey, oh, let's string this together until we're back in the office." But there were other teams that said, "Let's think through our onboarding process or operational processes." Anything like the processing paperwork, or setting up client meetings, or client service, it was like, "Hey, we don't have what we normally do. So now we have this technology, how do we actually make this work?" I mean, a lot of that was the utilization of technology, sure. But I think also it was, "Hey, let's rethink this and make it better?"
Kurt Dupuis:
Well, as a process guy, I'm sure that warms your heart.
Steve Seid:
Oh, my God. I'm excited over here. The second thing is they use it as a catalyst for business development, which we just mentioned. And the third, and this is going to lead into our episode is there's a lot of folks that felt good about the behavioral coaching that they did during the time when the market was crashing. I saw a lot of people mention like, "Hey, I went into the full toolkit to help people manage through and because things came back so quickly and so robustly, if you did that right, you felt pretty good."
Kurt Dupuis:
And great training environment for that too.
Steve Seid:
Right. Exactly.
Kurt Dupuis:
Because no one knew the snapback was going to happen so quickly. But if you can have those good behavioral conversations on the way down, but then in a month or two-
Steve Seid:
Just happen right away.
Kurt Dupuis:
Yeah. I mean, '08, '09 took a lot longer, right?
Steve Seid:
That’s right, that’s right
Kurt Dupuis:
It causes you to stick to your guns a lot more firmly. So yeah, that's interesting.
Steve Seid:
Yeah. And I'll just conclude with this. One of the things that we did with the paper is we had 10 conclusions and recommendations and I'll read just two at random. "Spend time with your team reflecting and discussing how to work better together in remote environments. Things like virtual scheduled huddles can improve this dynamic. What else can you do?" So this gets into the part of like, how do you work well together? "Build exercise into your schedule. Time block, no excuses." I won't read them all.
Kurt Dupuis:
Why were you pointing at me when you said that?
Steve Seid:
I was staring at you. But we've got 10, I think, really good recommendations. That was a fun study. Thank you, everyone who participated. We're going to do a lot more of that.
Kurt Dupuis:
And if you didn't participate, and you have some insight, I mean, we're still open for feedback. So reach out to us. Let us know what is working, what's not working. Just shoot us an email at thewholetruth@touchstonefunds.com. But it was fun. But this was your idea, I'll give you credit for it. But it was really great chance for both of us to engage with folks. I had fun with it.
Steve Seid:
Listen, I'm into this community thing. One of my resolutions for '21 is just to increase the engagement, to build that community, because you all are going to benefit from interacting with each other as much or more than working with us. So I really want to create that type of environment. And I sort of feel like the people that are engaged with this podcast really buy into that notion.
Kurt Dupuis:
Yeah. So we're going to have again for you our very own Little wunderkind, Mr. Ben Alge. One episode that we had earlier in the year was with a guy named Dr. Daniel Crosby who talked about behavioral finance. So what we wanted to do is put some legs on that and make it a little bit more applicable. So Ben has been working internally to develop some content around that, some ideas.
Steve Seid:
Yeah. People love that Crosby episode. They really do.
Kurt Dupuis:
I love it. I do too.
Steve Seid:
If you haven't heard that, go back and listen to it. I don't look at the metrics closely, but the last time I did, I think that was our most popular episode. So we'll be right back with Ben Alge. This is The Whole Truth. Stick with us.
Disclosure:
The views expressed herein are those of the participants and not those of Touchstone Investments.
Steve Seid:
We've got Ben back, Kurt. Ben came back.
Kurt Dupuis:
He is back.
Ben Alge:
Happy to be back. Thanks for having me.
Steve Seid:
How did you like the first time? Let's talk about this. I know you showed up here so it must not have been too bad for you. But the feedback we got was pretty amazing on that last episode, The Challenger Sale episode you did.
Ben Alge:
Oh, it was a blast. I had a ton of fun doing it. And the response I got from those who listened was very positive, too. And I feel like I've done some things in my life that I've been proud of, I'm not sure my parents been more proud of anything else that I've ever done than when they saw my name on a podcast. They couldn't believe it.
Steve Seid:
Is that right?
Ben Alge:
They were so proud. And so thanks for having me back. I'm sure you've made my parents day.
Steve Seid:
I think it's always been pretty cool for me that I can search Spotify and find myself. It's just the email you sent out to them or how did they find the thing?
Ben Alge:
So I just sent them a link. I had shared it on LinkedIn and send it to them thinking they would just see the title and say, "Oh, that's nice." I don't know, the episode was about 40 minutes long, about 42 minutes later, I got a call from them just so excited. They'd listen the whole thing, they love The Challenger Sale, they love the podcast. So you got two new subscribers in Toledo, Ohio, with my parents as of a few weeks ago.
Kurt Dupuis:
What loving supporting parents you have.
Ben Alge:
They are. They're very excited. And today is actually my dad's 65th birthday. So it's like a birthday present of second podcast episode. So I appreciate you guys having me back on.
Kurt Dupuis:
And Ben, you're also our first reoccurring guest. First recurring guest on the show.
Steve Seid:
That's right.
Ben Alge:
Really? What an honor. What an honor. Thank you, guys.
Kurt Dupuis:
Yeah.
Steve Seid:
Here's the big question. Did Caroline listen to it?
Ben Alge:
She did. She did. And we have two young children, one only six months old, the other one is two and a half and he thinks it's incredible that daddy's voice is on the radio. He can't believe it. So they'll be driving to school and they'll replay the episode of the podcast just to hear dad's voice.
Kurt Dupuis:
Oh, is that why the numbers are so good?
Ben Alge:
That’s right that’s right a lot of listens out of Cincinnati.
Steve Seid:
It's all like a kindergarten class or something.
Kurt Dupuis:
Yeah. I think Becky listens. She's always listening to Howard Stern. I don't hear my podcast too often from her. But I think she listens, I hope.
Steve Seid:
We had the internals on which will be released before this episode comes out. And what Kurt and I learned is that the internals really don't listen to our show.
Ben Alge:
I could say I'm a proud listener of every episode thus far. And so you guys are doing a nice job. It's getting better and better too. Outside of that one episode on The Challenger Sale where you slipped up with the guest, it's been pretty good elsewhere.
Steve Seid:
We appreciate it. Thanks for coming back. What the episode today is going to be about is behavioral finance. If you haven't listened to the Daniel Crosby episode, go back and listen to that for sure. And by the way, go back and listen to The Challenger Sale with Ben Alge if you haven't heard that as well. But basically things on this show are going to build. There'll be topics that will come up that we’ll go and want to take the next step on and research, and that's what happened with the Crosby episode. And I knew that that was an area that Ben was really interested in as well so we just kind of teamed up and did some work on it on behalf of the enterprise. I kind of volunteered Ben. He didn't realize I was volunteering him, but I did. You want to tell that story, Ben, of how I just said, "Ben's going to do this with me."
Ben Alge:
That's exactly what happened. That's the end of story. I got an email one day that, "Steve said you guys are working on this, let us know when you're done." And a third job fell into my lap.
Steve Seid:
There you go. So Ben and I spent some time researching the topic. We came at it to answer two particular questions. The first is end clients, so clients of financial professionals, what do they really need to know? What can we give them that would allow them to be better investors and clients, et cetera? And the other thing was, how can financial professionals integrate these concepts into their business? Really have that become a part of what they do.
Kurt Dupuis:
So what are we solving for here?
Steve Seid:
Yeah. I think the origins can go back to Daniel Kahneman and Amos Tversky, who were two Israeli psychologists that were studying how people make decisions for the Israeli army. Like who makes a good fighter pilot? Why do people make poor decisions in different conditions? Michael Lewis wrote an incredible book about that, you should read. And you could also redirect research from Kahneman which, Thinking Fast and Slow. But how it evolved in our industry is essentially, from an academic perspective, there were a lot of assumptions in the models of how things work.
Steve Seid:
So think back to the '70s, the efficient market hypothesis, and that was a way to explain financial markets. And it was beautiful in it's in simplicity, but it made a lot of assumptions. For example, one of the assumptions it made is people are rational agents. Kurt, you ever heard that term rational agents? People always make the ideal decision by risk and reward. And you heard Dr. Crosby talk about this on our podcasts. That's just not how people are. And so that's where behavioral finance came in. It came in and said, "Okay. We know these models. They're nice looking, but that's not how people behave." And so then there was a few different people that are credited to bring it into our industry, but it really came from that original research. Hopefully, that was a decent, if not long winded introduction. But maybe a good place to start then, Ben, is talk about... There's a couple of types of biases. What are those two types?
Ben Alge:
So primarily, two types as they talked about are cognitive biases and emotional biases. And so the difference is cognitive is an error in reasoning, a faulty reasoning. You're thinking through a problem incorrectly, whereas emotional biases is more of a faulty impulse or faulty reaction to a problem that arises.
Steve Seid:
So can you give examples of those, preferably ones that revolve around the casino?
Ben Alge:
The gambler's fallacy, we've all heard quite a bit of, sure. So from a cognitive perspective, think about things like the confirmation bias where we look for information that we already know to be true or already believe in and we put more weight on that as opposed to an emotional bias where things like loss aversion. I hold a stock that is down, I don't want to sell it because my reaction is realizing a loss is a bad thing. And so both really look at not necessarily information we're given, but how we apply the information. And there's a great anecdote. I first heard this from a speech by Daniel Siegel, he did it back in 2017. If you google him you can find this. But it's called the bullet hole misconception.
Ben Alge:
There's a story from back in World War II where the allied troops were getting airplanes shot down left and right with these bombing runs. And so they conducted a study to say, "Why is this happening? How can we retrofit these planes to better withstand the war?" And so they mapped out an airplane with all the bullet holes they found from the planes that came back. What they found was it was centered around the wings and the tail. And so they said, "Okay. We need to go in and reinforce the wings and the tail." But there's a big problem in that. They're only looking at the planes that came back. And so the wings and the tail were actually not the areas to reinforce, it was everything that wasn't showing up was the actual problem. Oftentimes, especially in our industry, in financial services, we have countless amounts of data. It's not a lack of information, it's how we interpret that data and how we apply that data which behavioral finance gets right into the heart of and why I think it's such an interesting topic.
Steve Seid:
So of the two, of the cognitive and emotional, which is the hardest one to overcome?
Ben Alge:
So the emotional proves to be a lot harder to overcome because it's a reaction, not an error in terms of how you're analyzing. And so I can explain to you things like recency bias, that you're giving more weight to that data, analyze that differently and you can work around that. Your emotional response is much harder to correct because it stems from an emotional predisposition and not the way you're thinking about a problem.
Steve Seid:
Financial professionals, you can address both of them, it's just fair to know that emotional is much harder to deal with.
Ben Alge:
Certainly and awareness is the first step. Being aware that these biases exists gives you a huge leg up versus just operating blindly and having the biases that we all have, but not being aware and not trying to adapt to them.
Steve Seid:
Excellent. So we've got these cognitive errors, we've got these emotional errors, we're going to move into how financial professionals can think about this. I do want to bring up one particular concept of why these biases exist to begin with. There are two systems in our decision making, and this comes from Thinking Fast and Slow by Kahneman. You have system one, which is fast, immediate, effortless. When you get stimuli that comes to you, it's that immediate response, it's that immediate decision. System two is when you actually take time to think about something and you say, "Hold on, let me put some mental energy towards that." And a lot of these biases come out of system one, our immediate responses.
Steve Seid:
Now, system one's not a bad thing. From an evolutionary perspective, we really needed to have the ability to make quick decision making. There's an example that Crosby used in his book where if you're on the plains in the savanna and you see rustling, your immediate response is get out of there because that may be a lion, you got to get out of there. But the key is that those immediate responses cause us to make errors. So Ben, now let's move into what we see from financial professionals. Ben has interacted with thousands of financial professionals. So what do you specifically see here?
Ben Alge:
So, a couple of areas we can talk about here. We've got a lot of experience in the practice management side certainly, but start on the investment side, study after study, you can look at Dalbar, Morningstar, a number of different ones out there show that investor returns, the returns people actually experience trail total returns, the returns on the investment, by a wide margin. Anywhere from 25 to 50 basis points annually up to 200, 300, 400 basis points annually. Depends on the study and the timeframe. So why is that? The answer is the behavioral side. It's the buying high and selling low, it's the moving with the masses.
Ben Alge:
So depending on the research you look at, there's anywhere from 1% to 4% to be gained just by correcting these biases in our investing life. And so a huge gap. That's what recognizing this is actually worth to you. On the practice management side, one of the biases that is evident is the fallacy of choice. We look at our clients, and they have 20,000, 30,000, 40,000, mutual funds and ETFs to choose from. Not great in terms of narrowing down your focus. The fallacy of choice talked about we think that having more choices is a benefit and the more choices, the better. But in actuality, there becomes a point of diminishing returns where you're actually worse off with more choices you have.
Ben Alge:
Financial professionals say, "Well, I'd narrow that down." But we've worked with 2,000 teams, and the average team has over 350 mutual funds and ETFs. So the fallacy of choice still plays in the practice itself. And so what we work with teams to do is narrow that focus down to a single or maybe two or three investments per space to eliminate that fallacy of choice, focus our efforts and try to capture some of the risks associated with all those one off investments.
Kurt Dupuis:
I remember seeing something in the book Nudge that talks about the ERISA space where folks are constructing their ERISA plans. Just the difference between opt in and opt out systems for those plans yields completely divergent responses for that participants in those plans.
Ben Alge:
Yeah. It's the intersection of psychology with economics. And to Steve's point earlier on the rational being, I remember my intro to econ classes thinking, "That's not real. How do you see that in the real world?" And the truth is, when you work with a large population it becomes more and more realistic, but there's still this irregularities that exists because of the lack of rationality and individual where psychology plays a role. And so the intersection of those two is so much more useful to me because it's what you see in the real world and not some economic theory that may or may not be applicable.
Steve Seid:
Yeah. So we got fallacy of choice. There's probably a lot you could do, but anything else you'd bring up in terms of what you see from financial professionals?
Ben Alge:
The other one we see a great deal is the recency bias. Morningstar is fantastic for the amount of data that it provides, and the focus is now on star ratings, which don't get me wrong, can be directionally informative but have little to no impact on future performance. And so we've gotten into this habit of looking at recent returns and giving them outsized weight when in actuality there's so many other things outside of what you've done the last five years that are all the more impactful to future out-performance.
Steve Seid:
Those are two really good examples, Ben. There's a lot more that we have. If you want to kind of learn some of the other things we've learned from our studies with financial professionals reach out to us, thewholetruth@touchstonefunds.com, and we're happy to kind of walk through the exhaustive list of what we see.
Kurt Dupuis:
So I want to get inside to something that we talked about already with Dr. Crosby and that's rules based investment, RBI. Because it strikes to me as one of the most applicable things for both financial professionals and their clients.
Steve Seid:
I kind of comb through all of Crosby's books. What are the actual solutions? And this is one of the things that he brought up, which is RBI are rules-based investing. He has four Cs for how you can integrate these principles into investing. First is consistency. The second is clarity. The third is courageousness. And the fourth is conviction.
Steve Seid:
So consistency, that's straightforward. Don't just walk in on a Tuesday and decide to tinker with portfolios. That's not to say that you can't trigger looking at portfolios based on what's happening in the environment, but have some consistency in terms of what you're making changes. Clarity, he writes, "Prioritize evidence-based factors, ignore frightening but unlikely." So the first part of evidence-based factors, there's no shortage of opinions out there in terms of market direction. But focusing on things that actually are grounded in evidence is really important. Frightening but unlikely, is spending way too much time thinking about that left tail risk. It's not to say you shouldn't prepare for the worst, but don't let fear paralyze you.
Steve Seid:
The third is courageousness. I'm going to open this up to you guys right now after I describe it, because this is a hard one, right now. He puts automate contrarianism." That's pretty straightforward. You rebalance, if one asset class has gone too far, you kind of pull back. You want to automate that because that's going to be a hard thing to do in real time. And as we sit here at the end of 2020, there's a part of the market that's just been better than every other part of the market. And had you rebalanced out of it, you'd be losing. So I guess I'll pose this to either of you guys. How do you think about contrarianism right now?
Kurt Dupuis:
Well, I think consistency and courageousness go hand in hand, right? If you're describing what a consistent process looks like, the courage is actually sticking with that despite market conditions. So I personally am a big fan of automation. I automate as much as my investing as possible but it doesn't hurt to have that little play money that's not consistent and that is not courageous and it's more tapping into the emotional biases. But to me, it doesn't make sense to build the system if you don't use the system. That's where the courage comes in because it feels like the wrong decision. It's the exact opposite of the emotion you want to be experiencing when you're either putting dollars to work, or maybe not putting dollars to work.
Ben Alge:
I think what you're describing, Kurt, is you're feeling that bias in play that you're trying to disrupt with the system you put in. There's very few universal truths in our industry, and so when everybody believes something is probably the time they need to be moving away from that the most. And so putting those systems in place that Steve is talking about is what allows us to counteract the bias that's in our heads of recency. That we've seen this happen. It feels right. Everybody's saying, "We're going with the herd." It forces us to counteract our own biases. And yes, in the short term and in any one-off situation, you could be proven wrong. But more often than not, you're going to be better off doing that than you are just going with the herd.
Steve Seid:
There's something to be said about momentum and catalysts for this stuff. But nevertheless, I think that it holds that you should do contrarianism.
Kurt Dupuis:
People will assume what we're talking about is wholly in or wholly out. I think it's obvious that that's not what we're talking about, right? You're trimming. But I think anyone that I've helped to develop an IPS with, you're range bound, right? So even if you have a process in which you're rebalancing once a year, if you're at the upper end of the range or outside of the range, you can go back to that upper band of the range, right? So you're making small incremental changes. But I just go back to my previous point, if you're not going to stick with the system, why build a system, right? But if you have an IPS just stick with the IPS, because those are laborious documents to put together. But use the dang thing.
Steve Seid:
Yeah. That's a really, really good point. So again, consistency, clarity, courageousness, and then the last thing is conviction. I'll tell you something. I'm curious if you guys see the same thing about conviction. Diversification, we know we need it, man, is it overdone in our business?
Ben Alge:
We see it all the time. And diversification is really important. And you want to diversify away as much of that unsystematic risk as you can. But that said, you very quickly become the market if there's over diversification. We don't need 300 holdings in the portfolio.
Kurt Dupuis:
How else can financial professionals incorporate behavioral finance? I think we've got a couple of good ideas, talk some big picture, but let's continue to be specific.
Steve Seid:
Yeah. So we just talked about defining an investment process that incorporates behavioral finance, we talk about rules-based investing, acknowledge that this is something that should be part of your investment process. The second thing is incorporating behavioral finance in your value proposition. Making this a part of your value and what you communicate to end clients. Dr. Crosby brought up the concept of behavioral alpha. What is the excess wealth that you as a financial professional can deliver just from the advice you give? It's a really profound thing. Incorporating behavioral finance in your client reviews. You have the structure for how you go through your reviews with clients, bring that in there. We can help you do that. That should be something that you should incorporate.
And the last two I would say is, we've talked in the past about PAR, which is our Practice Analysis Review. There's a lot of stuff we can uncover about your business from the behavioral side, through PAR. Some of the things that Ben's talking about, we can identify for you. And then the last thing that we listed was having client events. So just general education, having a series of things that you can work through and making this topic something you're talking about all the time. So that's kind of how I would sum up how financial professionals can bring this all together.
So Ben, maybe let's transition away from financial professionals and we'll conclude with how end clients should think about this. So there was a concept that we came across and it talked about processing of information and media.
Ben Alge:
It's getting harder and harder today to maintain a holistic view of any problem because of the way we consume media. It used to be, we all sat around and watched the same evening news and we all got different viewpoints and then you interpreted what you thought of those viewpoints. Now think about consuming media on Twitter. I have my Twitter feed, and I go there for news often. How easy is it now if I get a news feed that I don't like or doesn't fit my confirmation bias to just block or unfollow? And all of a sudden, I've tailored a message to only hear the information that I want to hear.
When I come into work every morning, I read five or six different publications. Because if all you seek out is information you already believe to be true, you're setting yourself up for disaster on the downside.
Tangential story, we just came through this election, my wife and I do not see eye-to-eye politically whatsoever. But we have a rule in our house that allows us to co-exist. And it says, "If you can't unemotionally explain the other side's viewpoint, then we can't discuss the topic." And I think that's equally applicable to our industry. Because when you think about it, if you make a trade, every trade or investment we make, somebody thinks you're an idiot because somebody is on the other side of that buying stock you're selling or selling the stock you're buying. And so challenge yourself to unemotionally think what aligns with my viewpoint, and what's the other person thinking?
Steve Seid:
Yeah. And I think about the sensationalism. So if you turn on CNBC or Bloomberg, what their job is to do, and not to beat up on those things, but they amplify the emotionality of what's going on in the market. There’s so many things you can get ahead of if you talk to your clients in advance about it, prepare them for it. And this is what we mean about behavioral coaching. "These are things we're going to see, here's how you can think about and here's how you should react." So when that inevitably happens, you don't have to go back and kind of have that conversation while it's happening. That make sense?
Kurt Dupuis:
And media literacy is going to be like a top five conversation that financial professionals need to be having with clients because it is so pervasive. You need more tools in your tool bag now than any other time in human history. And we're researching, actually some of this kind of how humans interact with technology for an upcoming show. And one of the really big takeaways has been what you were saying is, you got to have dissenting voices. You can't just create these echo chambers of your own thoughts, you have to listen to divergent views. It's healthy, it's reasonable.
Steve Seid:
All right. So Ben, maybe what we'll do is we'll conclude with besides media and consumption of information, are there any immediate steps that end clients can take right now?
Ben Alge:
So the first one, and not to pander to our primary audience is work with a professional. I talked about earlier there's 1% to 4% in savings to be had by not falling prey to these behavioral biases. That's what financial professionals are there for. So find a professional who, as Steve mentioned, has this in their value proposition, that they consider these elements and bake it in. A couple others, one, be a student of the game. It's so easy to watch CNBC and feel like the sky is falling or the sky will never fall based on what we're seeing that day. Understand that markets ebb and flow and growth comes in and out of favor, and stocks go up and down, and small caps rally. And then perhaps the most important and the simplest, and the one I like the most is, be comfortable just saying, "I don't know." It's so rarely used. You watch any sort of news or entertainment news, you'd call it, nobody ever says, "I don't know." They always have the strongest opinion and they're banging their fists one way or another. I was lucky enough to meet Warren Buffett back when I was doing my MBA, and the one thing I remember him saying when he was speaking to our group was his favorite part of investing is that you can sit and watch 99 perfect pitches go by, and you only gotta to swing at the one you know is perfect.
And so the ability and comfort to say, "I don't know." The smartest people in the room are the ones who say, "I don't know." And oftentimes, those that have the loudest opinions are those that are compensating for something else. And so if you're comfortable saying that, you're ahead of the game.
Steve Seid:
Thanks, Ben, for going through all that. There was a lot there but hopefully, you left with a little bit more of a foundation for where this concept came from, where it's going, how you can integrate it in your practice, and how you can coach and teach your clients about it. If you're wanting to learn more, you hear this, you're like, "Oh, that's interesting." Reach out to us and we'll help you with it. So we're going to come back with Ben in a moment. This is The Whole Truth. Stick with us.
Kurt Dupuis:
So welcome back. We're still here with Ben. And if you remember back to our episode talking about The Challenger Sale, we talked a little bit about some of the work that Ben has done with niche markets, developing your niche market, and then figuring out marketing plans to go after said niche. And yes, it's niche, Steve, not niche. But I have a general-
Steve Seid:
I don't think that's true.
Kurt Dupuis:
... marketing question that you think of lawyers, you think of real estate agents. A lot of different professionals use like billboards and different types of marketing. Why don't wealth managers use those types of marketing avenues?
Ben Alge:
Interesting question. I think-
Steve Seid:
I think I've seen it a couple of times.
Ben Alge:
I don't think the financial professionals want a majority of people driving on the highway as clients. They want a select subset of those people. I think a lot more people buy homes and need a real estate agent, than have the investable assets for a top level financial advisor. And so maybe it's just the amount of targeting that needs to be done. But actually to your point, I don't think I've ever seen a wealth manager on a billboard, but I could be wrong.
I mean, if your niche was surgeons, why not have a billboard outside the hospital? I don't know.
Kurt Dupuis:
There's got to be a scenario where it makes sense. It just surprises me that I've never seen it.
Steve Seid:
I think, Kurt, starting a business as we're talking right now, he wants to be billboards for-
Ben Alge:
He's got billboards for sale down in Atlanta.
Kurt Dupuis:
No. You know what I've thought about?
Steve Seid:
It's a good idea, but the passion, it's like something's happened in there. You know?
Kurt Dupuis:
No. Do you remember the movie, I Love You, Man. Paul Rudd, what's the other guy's name? I'm horrible with actor names. But he actually takes his own money, but he borrows it. And he posts a bunch of billboards. He's a real estate agent, and he gets all those new business and it's a great thing. Was like, "Oh, why don't financial professionals do that?" But anyway. So we started talking about niche marketing with Ben on the last episode. So we just wanted to kind of throw out a few different ideas of questions that people should be asking when they're developing their niche, things to work through.
Steve Seid:
We brought two things each that we should know about your niche. Now, we'll judge each other. The first one that I think is pretty straightforward, is what organizations, clubs, trade associations support that niche? So if you are going after a surgeon, what trade associations does that surgeon go to? What clubs, et cetera? So the supporting groups for that niche. Yeah or nay?
Ben Alge:
Very yay. Absolutely.
Kurt Dupuis:
Very yay. Oh, okay.
Steve Seid:
I mean, I got to go first. If I screwed that up, that's an easy one.
Kurt Dupuis:
Well, when we get to mine, you will have a chance to throw pitches at each other. So don't worry.
Ben Alge:
I'm sorry. I didn't know you want a response there. I could have come up with something better than yay-yay. But yes, that's a very important component to have in place.
Steve Seid:
Excellent. Okay, Kurt, you want to go next?
Kurt Dupuis:
So, idea number one is that if you have a niche in a particular company, you need to have some sort of SWOT analysis on that company. You got to speak to the problems that folks that do work or have worked or will work for this company deal with. It was an idea that came out of our previous conversation that you need to know problems before your clients know that they have problems and be able to identify those. So just understanding on kind of a superficial SWOT level what the business challenges that these folks are going through might be practical.
Ben Alge:
So Kurt, I'll piggyback on that because mine is understanding the primary professional risks associated with your niche. And I think that's getting to what you're talking about as well with the SWOT. So if we take the extreme example, let's say you have a niche of coal miners, there's probably some life insurance needs associated with coal miners that you and I don't have in our day-to-day job. Athletes. You talk about the length of time an athlete actually earns money depending on which professional league they're in, it's pretty short. So those are the obvious ones, but take for existence what we do. If someone was focused on individuals who work in the financial services industry, we have an inherent risk that our compensation is very directly tied to the financial markets. That when there's a significant market pullback, our income is probably pulling back and our job security is probably pulling back as well.
If you can identify that problem and let clients know before that happens that you're taking into account in terms of, "Well, you would be a 60/40 portfolio because of these overweight equities in your income, we're going to alter that," that's something most clients haven't thought of. Understanding what those professional risks are associated with that job is critical in that next step of thinking beyond just, "I go after doctors."
Kurt Dupuis:
So my other thought is you've got to be well-informed and well-connected to the HR department. If you can somehow get a glimpse into their hiring practices, their firing practices, when there's big substantial employment shifts going on with the company and you're there providing educational resources, providing service to those folks, I just think that that's... If the ERISA employment, kind of pre-retiree segment is what you're going after which most financial professionals, it is, beefing up your HR Rolodex might be a good idea.
Ben Alge:
Kurt, you and I are on the same wavelength today because my next point piggybacks beautifully on that, which is having a primary contact for your niche to go to when it comes to things like benefits. And it's not having a phone number they can call. It is having an individual they can talk to that you have communicated with that you are pointing your clients in that direction. So if your niche is a individual company, it's very easy. It's somebody within HR, but everybody has a phone number they can go to. Not everybody has a financial professional telling them, "When you have this question, go to this individual. They'll get it answered for you." The best solution is you have the answer. The second best solution is you have the person that can get them that answer.
Steve Seid:
Yeah. Man, I'm getting all kinds of ideas that are jumping in my head based on this conversation. I know we're only supposed to do two apiece, but you guys are just so darn thoughtful. Let me share a couple things that are popping in my mind. One is solutions you know they need outside of you. So you want to handle their financial well-being. But what other types of solutions and resources do people need that are in that particular industry? So I had a client of mine who's a member of our community that was working with people that were in an elderly market. And he had things like all kinds of different medical referrals like chiropractic and massage and all these different things that if they were looking for someone, they didn't even have to think about it. He's like, "Hey, this one is completely vetted, so I think that could be kind of an interesting thing, is to build out that service infrastructure. Is that reasonable?
Kurt Dupuis:
Yeah, the more people you can help connect clients with, you're more embedded in their lives. That's a good thing.
Ben Alge:
Yeah, there's that concept in the supernova model of the enthusiastically endorsed referrals. I guess what you're looking at is I enthusiastically endorse these individuals for their services outside of what I provide. The broader that can be, and now to your point, Steve, great idea that the more specific you can be to that niche, all the more relevant you become to every aspect of their lives, not just their financial lives.
Steve Seid:
Well, I've got two more. Can I throw my other two based on that conversation?
Ben Alge:
Sure.
Steve Seid:
What do they actually want to achieve? We talked about problems, but let's take it back from our business. We're working with financial professionals who want to manage money of N clients. And a lot of the things that we do, including this podcast, is helping them with that knowing what they want to achieve. There's probably some opportunity in niches to understand what they are trying to achieve and help them with that. Is that reasonable?
Ben Alge:
It is. And it piggybacks on a concept that I'm actually stealing from your podcast previously. I think it was actually when Dr. Crosby was on the podcast. He talked about the concept of unfair advantages and how they exist often. It's not a bad thing to take advantage of it. What unfair advantages does your niche have? Think about professors at a university. Unfair advantage is that their kids go to school for free. What does that free up in the rest of their financial lives? I bet if we think about it, those exist more broadly than we think. Isolate those unfair advantages or benefits as opposed to risks, and really isolate those and approach them with what opportunities that provides them could be really compelling stuff.
Steve Seid:
I think one thing we haven't talked about yet is, who do you actually want to know get into the pipeline? Fill out a list of people that you want to meet. Where can that list come from? Well, it could come from board of directors of trade associations. It can come from LinkedIn, but actually getting a sense of who you'd like to meet, that's probably a pretty good thing to have on hand in your pipeline for when you're interacting with people throughout the niche, right?
Ben Alge:
Absolutely. You got to be deliberate about it. Too much of what we try to do is by way of whim and hoping that more come across. I have a lot of doctors in my practice, I hope I get more. No, be deliberate. Go out there and actively recruit the type of people that you want to be a part of your practice because of that niche and use the niche to your advantage and you're going to be more successful.
Kurt Dupuis:
I love it.
Steve Seid:
Excellent. Well, I think the key point here is that you want to go after a niche? Start to build the capabilities, the differentiation, all that to actually go after it and be purposeful about it. I like that word that Ben just used. We're going to transition to the Costanza Corner. This is The Whole Truth, stick with us.
Steve Seid:
And welcome back everybody to The Whole Truth. This is our Costanza Corner. Kurt, you are up.
Kurt Dupuis:
I won't belabor this too much, but it seems like in times of stress, there's two paths you can take. You can take the, "I'm just going to protect me and mine and get mine." And some people default to, "Well, crap, This is really serious and we all need to come together to solve these problems." I was very encouraged by reading an article about a guy in India who works in HR ironically enough who has spent his $75,000 of life savings to create a rice ATM for his community.
Steve Seid:
A rice ATM.
Kurt Dupuis:
Yes. So he's cashed in his life savings and bought rice. And he just lets people line up and gives them portions of rice so that they can stay fed because hunger is a big problem in his area. And so he's cashed his own chips to help his own community and just give out rice to make sure people have the calories they need to survive, which is in India, and that's a problem there. But I read recently that there's five million people that are struggling with hunger in our country since the pandemic. So plenty of opportunities for us to increase how we're helping our local communities as well.
Steve Seid:
What can you say? How wonderful is that guy? Karma, man. Karma.
Kurt Dupuis:
Life savings? Yeah.
Steve Seid:
Yeah.
Kurt Dupuis:
There's great images just with him in front of gigantic trucks of rice, and there's just the lines circling the whole block.
Steve Seid:
He's a hero.
Kurt Dupuis:
Yeah. He's a hero.
Steve Seid:
Awesome. Well, that certainly is uplifting. Thanks, everyone, for listening. We'll see you next time.
Kurt Dupuis:
You can find The Whole Truth and subscribe for free on Apple Podcasts, Spotify, or your favorite podcast app. We'd love it if you took the time to rate and review the show on Apple Podcasts. It helps others find the show. And for more episodes of The Whole Truth, go to www.touchstoneinvestments.com/thewholetruth. That's touchdowninvestments.com/thewholetruth, all one word.
