Weekend Reading for Financial Advisers: Behavioral Finance, Twitter, and Memory

It was a big week for Vatican watchers — Habemus Papam! (“We Have a Pope!”) — and mathematicians. (March 14th is Pi Day, the official celebration of the mathematical constant pi. Who Knew?) Still, there were plenty of interesting (non-Papal) reads. Here, in no particular order, is some of the best content I’ve come across over the past few weeks.

Behavioral Finance

• To start off, some comic relief (quite literally): Dogbert on the power of anchoring. (Dilbert)
• In a previous roundup, I included Dilbert’s take on overconfidence or, to use the behavioral finance term, “optimism bias.” But what about a lack of confidence? Carl Richards, author of Behavior Gap, says underconfidence has a high cost. While this is not something we encounter too often on Wall Street, we are all subject to bouts of second guessing. “We wouldn’t be human if we didn’t second-guess our decision when stocks go up and part of our portfolio is diversified in safe fixed-income investments,” writes Richards. “But not having the confidence to stick with that plan can lead us to make the big mistake: bailing on the plan.” (The New York Times)
• What’s the biggest lesson that behavioral economics has to teach investors and advisors? According to Greg B. Davies in “How Industry Experts Are Making Sense of Behavioral Economics“: “The biggest lesson is that investors wanting the best risk-adjusted returns is nonsense. What investors are truly after is anxiety-adjusted returns: the best possible returns, relative to the anxiety, discomfort and stress they’re going to have to endure.” (OnWallStreet)

• “Using Behavioral Finance to Improve the Adviser–Client Relationship” was published back in 2010, but I only just stumbled up on it. It’s just as relevant today as was back then. (The Research Foundation of CFA Institute)

Retirement

• We all know that retirement planning isn’t what it used to be: Baby Boomers are living longer, and their money is running out. So is goals-based investing the answer? According to James Carney, chief executive of ByAllAccounts, “investors are realizing that the old-fashioned way of managing their wealth is not going to get them to the Promised Land, and instead, are turning to goal-based wealth management.” Moreover, “we are in the midst of a sea change in wealth management in terms of how advisors and their clients alike will measure success in the future.” (ByAllAccounts)
• In “Breaking Free from the Safe Withdrawal Rate Paradigm: Extending the Efficient Frontier for Retirement Income,” retirement researcher Wade Pfau writes that “combining stocks with single-premium immediate annuities (SPIAs) may be the way to optimize a retirement income portfolio for a robust set of circumstances.” (AdvisorPerspectives)
• In an article on pushing back retirement, journalist Steven Greenhouse notes that “if America’s vision of retirement might once have been called ‘On Golden Pond,’ it would now more likely be called ‘On Thin Ice.'” (The New York Times)

Trust and Estate Planning

• Martin Shenkman notes that for many wealthy clients, fear of the federal estate tax is a thing of the past now that the exemption for a couple has been raised to $10.5 million and is portable between spouses. “Understandably, they will now expect their planners to offer less complexity and lower costs than they had to endure in the past,” he writes in “Wealthy Need New Trust Strategy.” “So what do you offer a client no longer threatened by the federal estate tax in this new normal of estate planning? Consider the new Swiss Army knife of planning: the multipurpose irrevocable life insurance trust, or MILIT.” (Financial Planning)

Investing

• A recent white paper, “Head and Shoulders above the Rest? The Performance of Institutional Portfolio Managers Who Use Technical Analysis,” may help to change the way technical analysis is thought of in the world of asset management. In a recent post, my colleague David Larrabee, CFA, discusses the findings and notes that “while the paper suggests that technical analysis may indeed boost portfolio returns, it is not clear whether it also extends careers.” (Enterprising Investor)
• “Asset Location: The New Wealth Management Value-Add For Optimal Portfolio Design?” (Nerd’s Eye View)

Social Media

• Do you Tweet? If so, you’re probably keen to gain more followers. The folks at Poynter.org put together a list of tips for journalists, but some of them apply to financial professionals. For example, find interesting information and credit the source, figure out how to add value, and be authentic. (Poynter.org)

And Now For Something Completely Different

• A few weeks ago, I urged readers to spend some time with Oliver Sachs’s fascinating essay on memory published in The New York Review of Books. This week, I watched a very interesting video interview with Elizabeth Loftus, a renowned expert on memory, which led me to the article “Removable Truths,” published in 2010. Both raise fascinating questions about memory, including the validity of recovered memories, the reliability of eyewitness testimony and, perhaps most interesting to me, “memory engineering.” (Slate)

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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