Susan B. Weiner Investment Writing - Susan B. Weiner Blog

Does your escrow account ever cross your mind? Probably not. But forgetting to monitor it can lead to lost money and a big headache. Read the rest of my article about escrow on HouseLogic.com, the website of the National Association of Realtors®.

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Fear prompts financial advisors’ clients to make bad decisions, as Meir Statman explains in his guest post below. He’s a renowned scholar in the area of behavioral finance, so I’m delighted to receive his guest contribution and a free copy of his new book, What Investors Really Want, thanks to my friends at McGraw-Hill.

Client fears and financial advisor services

By Meir Statman

Many financial advisors encountered clients who were urged by fear to cash all their stocks in late 2008 and early 2009. Today, some advisors encounter clients who are urged by fear to replace stocks and bonds with gold.

Clients are often urged by cognitive errors and emotions to act in ways that damage their long term financial health. In that, clients are like patients who are urged by cravings to smoke or eat more than is prudent. Financial advisors are financial physicians. Good financial advisors listen carefully, empathize with clients fears, diagnose, educate, prescribe solutions, and follow up. Physicians do their work with the tools of science. So do financial advisors who teach clients the science of financial markets and the science of human behavior.

We know from the science of human behavior that we are less willing to take risk when we are frightened than when we are calm. In one experiment, a group of students were offered money to stand before the class the following week and tell a joke. A flat joke can be embarrassing, so it is not surprising that some students who agreed to tell a joke withdrew in fear when the time came to stand and tell a joke. But students who were frightened were more likely to withdraw than students who were not. Half the students in the experiment were shown a fear-inducing film clip from The Shining, Stanley Kubrick’s classic horror film, before deciding whether to tell a joke or withdraw. It turned out that a greater proportion of them withdrew.

Fear misleads us to avoid risk even when it is wise to take risk. Here is an investment game: I’ll toss a coin right before your eyes. If it comes out heads, I’ll pay you $1.50. If it comes out tails, you’ll pay me $1.

We’ll play 20 rounds of this game. Before each round you can choose to participate or sit it out. Ready? Suppose that you have lost three dollars in the first three rounds because all three tosses came out tails. Do you choose to participate in the fourth round or do you choose to sit out?

Three losses in a row would arouse fear in normal investors. Many choose to sit out the fourth round. But there is no good reason to be afraid because the game is stacked in favor of those who play all 20 rounds. In each round we have a 50/50 chance to lose $1 or gain $1.50. Our maximum loss is $20 while our maximum gain is $30. And even if we lose, a $20 loss is hardly catastrophic. Yet brain-damaged players were more reasoned at the game than normal players. Undeterred by fear, brain-damaged players played more rounds of the game than normal players and won more money.

There is a lesson here for advisors and clients.  Fear grips us when we watch our portfolios day by day and see so many losing days.  Fear grips us even more strongly when we watch losses in our portfolios over many months or even years, as happened in 2008 and early 2009.  Fear urges us to sell our stocks and invest the money in gold or put it under a mattress.  The fear of clients is normal, and financial advisors can counter it by teaching clients the science of human behavior.

Meir Statman is the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University, and Visiting Professor at Tilburg University in the Netherlands and the author of What Investors Really Want (McGraw-Hill). His research on behavioral finance has been supported by the National Science Foundation, CFA Institute, and Investment Management Consultants Association (IMCA) and has been published in the Journal of Finance, Financial Analysts Journal, Journal of Portfolio Management, and many other publications. A recipient of two IMCA Journal Awards, the Moskowitz Prize for Best Paper on Socially Responsible Investing, and three Graham and Dodd Awards, Statman consults with many investment companies and presents his work to academics and professionals in the U.S. and abroad. Visit his blog http://whatinvestorswant.wordpress.com/

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Need to write better? Register for my next class on “How to Write Blog Posts People Will Read: A 5-Week Writing Class for Financial Advisors” starting May 16. You won’t get another chance to take this class until 2013.

Receive a free 32-page e-book with client communications tips when you sign up for my free monthly newsletter.

Some marketing techniques work better than others for financial advisors.

The five most effective techniques for freelancers (who share key characteristics with financial advisors) include the following, as described in The Wealthy Freelancer:

1. Tapping your network
2. Getting more out of existing clients
3. Investing in smart local networking
4. Leveraging social media as a networking tool
5. Employing direct mail

My network has always worked best for me, but the other four techniques help, too.

My referrals come mostly from current and past clients, many of whom subscribe to my monthly e-newsletter, another big contributor to my marketing successes. Although my clients typically work for large companies that aren’t big on social media, they seem impressed by my social media visibility. Social media has expanded my network to include some great professional colleagues, referral sources, and an occasional client.

Smart local networking inspired me to launch my business. Many Bostonians have been generous with their time, advice, and connections. The Boston Security Analysts Society became one of my first clients and its timely presentations have provided the topics for many of my blog posts.

Direct mail has been the least effective technique for me. But I probably haven’t given the U.S. mail a fair chance because I’ve been so lucky with referrals from my network.

Thank you, all of my colleagues and referral sources, who have encouraged me! Every little bit helps.

What works best for you? Please answer the poll in the right-hand column of this blog. Feel free to leave a comment, too. I’ll report on the results in my January 2011 e-newsletter.

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Need to write better? Register for my next class on “How to Write Blog Posts People Will Read: A 5-Week Writing Class for Financial Advisors” starting May 16. You won’t get another chance to take this class until 2013.

Receive a free 32-page e-book with client communications tips when you sign up for my free monthly newsletter.

Sometimes it pays to hire an expert, even when you could do things more cheaply yourself. An expert can get you to your destination more quickly–and with less hassle–than if you travel by yourself.

My family could have reserved hotels and done a drive-yourself excursion on our recent safari through northern Tanzania, but I hate to think of all the yelling and screaming that would have resulted as we fought over “Which way shall we go?” and “Is that a lion over there?” Instead, we landed a great guide. He navigated unpaved roads with panache while spotting wildlife that was barely a speck on the horizon when I first looked in the direction he pointed. He also shared his in-depth knowledge about the animals. I got very lucky and spotted one leopard before the guide, but even that freak sighting wouldn’t have happened without him because he knew where the leopards hung out in Ndutu.

Think about your strengths and weaknesses before you decide whether to do a project yourself or hire a consultant. The boost in your productivity and pleasure could make the consulting fee worthwhile.

Highlights of my Tanzanian safari

This next section is an un-businesslike recap of the highlights of my safari. Stop reading now, if you’re looking for business insights.

Arusha National Park

An enormous flock of lesser flamingos was the highlight of this park. It sounded like rain when they took off. Animals that I saw in Arusha, but not elsewhere included colobus monkeys and blue monkeys.

In the city of Arusha, there’s a clock tower that represents the center of Africa, if you measure from north to south. There was an election-related demonstration around this tower while I was on vacation, although I wasn’t around then. Apparently the ruling party offered big bucks for a concession by the local winner from the opposition. People gathered around the tower saying “No, you can’t steal our vote.”

On the road to the next park, I saw many Masai people carrying water jugs because of a water shortage. If they weren’t carrying plastic jugs, they were carrying sticks and driving cattle.

Tarangire National Park

This is where I first saw wildebeest and zebra walking and running single file. Apparently they think this is the safest way to proceed, so that only one member of the group is exposed to danger.

The cheetah is a beautiful animal. It has a black teardrop will help you tell it apart from leopards.

I saw my first baobab–also known as an upside-down tree–outside the entrance to Tarangire National Park, not far from where my husband bought me a Masai beaded necklace.

From the Tarangire Safari Lodge, there’s a great view of a river where many animals, especially elephants, gather.

Lake Manyara National Park

Lake Manyara is where I saw my first hippos and water buffalo. If you look quickly, you’d think the hippos were big rocks sticking out of the water. The park supposedly has lions that sleep in trees, but I didn’t see any.

From Lake Manyara, I went to Ksima Ngeda Tented Camp, which is located at the end of a rocky, dusty road. One of the owners joked that it was too bad that the president had visited the region by helicopter because the road would have been improved if he’d come by car. I experienced a trip highlight at the camp. I asked if they could stick a candle on a plate for my uncle’s birthday. Boy, was I surprised when the entire staff brought out a specially baked cake and then danced around our table singing “Happy Birthday” in English and Swahili.

Not far from the camp we visited a tribe of hunter-gatherers. It’s a tough life. The women dig tubers with pointed sticks and gather berries that taste like radishes. The men are lucky if they bring down some small game. They hunt with bows and arrows, as you see in the photo where our guide is trying his luck.

Ngorogoro Crater

The crater is massive. This is where I saw six hyenas unsuccessfully try to steal a kill from two lions. This was also the closest we got to spotting a rhino. Our guide pointed to a pin prick that might have been a rhino, but we weren’t able to track it down. Later on, I heard another guide say that he prefers Americans to Europeans because Europeans will ask for a refund if they don’t see a rhino.

En route to Serengeti, a few boys with white patterns painted on their faces ran up to our Land Rover and hung on yelling “pikcha, pikcha,” asking for money for a photo. Apparently they were coming from a circumcision ceremony.

At Ndutu Lodge that evening, I enjoyed sitting by a campfire while some of the staffers fed an acacia mouse. The stars are very clear when viewed from the African bush.

The next morning, we saw lots of impala. Our guide said, “If you see impala, that means there must be some cats.” Within 10 minutes I spotted my young leopard lying in front of a log.

Serengeti National Park

We saw lots of lions in Serengeti. Most interesting was watching a pride of about 14 lions in various stages of feeding on a buffalo.

More photos

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Need to write better? Register for my next class on “How to Write Blog Posts People Will Read: A 5-Week Writing Class for Financial Advisors” starting May 16. You won’t get another chance to take this class until 2013.

Receive a free 32-page e-book with client communications tips when you sign up for my free monthly newsletter.

Social media compliance is a big worry for financial advisors, so I was delighted when Bill Winterberg offered to write a guest post on three easy steps to be compliant using LinkedIn messages. I’ve quoted Bill in numerous blog posts and tweets on technology, social media, and tweets because he’s a great resource.

Be Compliant When Using LinkedIn Messages

By Bill Winterberg, CFP^®

An earlier post on InvestmentWriting.com highlighted a “whopping flaw” in LinkedIn’s messaging system that poses compliance issues for financial advisors. The concern is that no viable solution exists to archive and retain messages using settings on LinkedIn.

I believe that advisors can use LinkedIn messages without violating regulatory requirements, provided they follow the three steps below. The key in all three steps is to leverage an existing e-mail archiving service to capture and retain messages sent via LinkedIn.

Here are three steps advisors can follow to demonstrate proactive compliance when using LinkedIn messages.

1.      Use an e-mail archiving service and use the e-mail address being archived with all LinkedIn messages. If you’re not archiving e-mails today, you’re going to have a challenging time responding to audit requests by examiners. They almost always ask for e-mail communication in one form or another.

2.      Configure your LinkedIn E-mail Notification settings to control how you receive e-mails and notifications. All of your General options should be set to deliver Individual E-mail, as shown below. This will feed all LinkedIn messages sent to you into your e-mail system, so they will subsequently get archived by the service you established in Step 1.

3.      Here is the only part that requires you to do something manually. When you compose new LinkedIn messages−or reply to messages received−you must click the “Send me a copy” check box under your message window. Again, the copy of the message will be sent to your e-mail address that is subject to archiving through your archiving provider.

These three steps will leverage an e-mail archiving service to capture and retain message sent through the LinkedIn messaging system. Upon examination by a regulator, advisors will be able to quickly produce all messages sent using LinkedIn.

Bill Winterberg, CFP^®, is a technology consultant to financial advisors in Dallas, Texas. His comments on technology and financial planning can be viewed on his blog at www.fppad.com.

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Need to write better? Register for my next class on “How to Write Blog Posts People Will Read: A 5-Week Writing Class for Financial Advisors” starting May 16. You won’t get another chance to take this class until 2013.

Receive a free 32-page e-book with client communications tips when you sign up for my free monthly newsletter.

CFA charterholders have strong feelings about fiduciary duty. This showed up in responses to my blog post on ” ‘CFA credential implies a standard of care not always upheld,’ says Forbes opinion piece,” which discussed brokers and fiduciary duty. So I’m happy to see that the CFA Institute has addressed this topic in “What’s a Broker to Do? Fiduciary duty and obligations under the CFA Code and Standards (registration required)” by Jonathan Stokes, head of Standards of Practice at the CFA Institute.

CFA charterholders who are brokers aren’t always fiduciaries

Stokes sums up the obligations of CFA charterholders who work as brokers as follows:

Although members and candidates must comply with any legally imposed fiduciary duty, the Code and Standards neither imposes such a legal responsibility nor requires all members to act as fiduciaries. In particular, the conduct of CFA charterholders who are broker/dealers may or may not rise to the level of being a fiduciary, depending on the type of client, whether the broker is giving investment advice, and the many facts and circumstances of a particular transaction or client relationship. (Bold added by Susan Weiner.)

Obligations vary by broker type

Charterholders challenges and obligations vary by broker type, according to Stokes’ article.

Execution-only brokers are not subject to fiduciary duty, but conflicts of interest should be disclosed. “Among the conflicts brokers should disclose are whether they offer different levels of services to all clients and whether they pay referral fees to outside organizations,” writes Stokes.

Retail brokers‘ clients should understand they’re in a relationship with conflicts of interest. I wonder how many grasp this. Clients often don’t absorb the significance of what’s written in a hastily skimmed client agreement.

Stokes says

For those who work in a sales capacity rather than a true advisory role, the client relationship is often based on the understanding that the range of investment advice is limited to that firm’s proprietary products or to other firms with distribution agreements with the brokerage firm…. Where the client agreement clearly states the nature of these conflicts, the client is deemed to understand that he will receive selective and potentially conflicted investment advice.

Institutional brokers “pose a particularly challenging area for application of the Code and Standards,” says Stokes. He notes that “disclosure of all relevant transaction details, including costs and commissions, is essential.” Moreover, “With multiple clients’ interests and objectives at stake, the institutional broker must remain impartial and reconcile (to the best of his or her ability) any conflicting client directions.”

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Need to write better? Register for my next class on “How to Write Blog Posts People Will Read: A 5-Week Writing Class for Financial Advisors” starting May 16. You won’t get another chance to take this class until 2013.

Receive a free 32-page e-book with client communications tips when you sign up for my free monthly newsletter.

SEC-registered advisors must rewrite Part 2 of their Form ADV using plain language. The requirement takes effect in 2011.

You won’t be surprised to learn that I favor plain language, but I’m curious to know what you think of the new requirement.

Please answer the poll in the right-hand column of my blog, asking  “What do you think of the plain language requirement for Form ADV Part 2?”

• Bad idea
• Okay, but will cost too much time and money
• Good idea, but I’m not sure if it’ll be implemented effectively
• Great idea, I’m looking forward to it
• None of the above (please leave a comment)

By the way, the SEC’s plain English handbook is a great resource for your Form ADV rewrite, as Deborah Bosley and Libby Dubick point out in “Lemonade from legislative lemons: New ‘plain language’ rules for Form ADV give advisors a chance to stand out.” Investment News (Oct. 4, 2010, registration required).

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Need to write better? Register for my next class on “How to Write Blog Posts People Will Read: A 5-Week Writing Class for Financial Advisors” starting May 16. You won’t get another chance to take this class until 2013.

Receive a free 32-page e-book with client communications tips when you sign up for my free monthly newsletter.

You’re getting smarter about writing investment and financial communications, so I’m giving you a challenge: watch this video and then tell me what lesson it teaches writers.

I look forward to hearing from you!

_______________________________________________________________
Need to write better? Register for my next class on “How to Write Blog Posts People Will Read: A 5-Week Writing Class for Financial Advisors” starting May 16. You won’t get another chance to take this class until 2013.

Receive a free 32-page e-book with client communications tips when you sign up for my free monthly newsletter.