by Carly Schulaka
Renowned author and speaker, Doug Lennick, CFP®, who is internationally known for his innovative work developing high performance individuals and organizations, just released his latest book, Financial Intelligence: How to Make Smart, Values?Based Decisions with Your Money and Your Life, published by FPA Press. FPA recently sat down with Lennick to talk about the new book and his work in the area of behavioral finance.
FPA: Your new book, Financial Intelligence, is written for the consumer, but what can financial advisers take away from the book?
Lennick: Well, the book actually gets at competencies that advisers themselves can develop and use for their clients and with their clients. In fact, the book is really representative of what we-The Lennick Aberman Group-have been teaching advisers for the last couple of years regarding what we call behavioral advice services. And in essence, this is the consumer version of those lessons. I do have a chapter in the book called "Calling In the Experts," and I certainly recommend to the reader that they don't go it alone. I mean, they would be advantaged to have an expert who happens to have the kind of competencies that the client really needs them to have, the most important of which is integrity.
FPA: What unique role do you see advisers playing in helping people plan for the certainty of uncertainty?
Lennick: I think advisers, when they're doing their best work, are doing that for their clients- preparing them for the certainty of uncertainty. I happen to believe there are too many professionals in the financial services industry who are trying to predict the future or guess the future, and as a result they are providing their clients advice that can't be as comprehensive as we would like it to be.
Really, what we want advisers to be able to say to clients is, "If you follow my advice, which will prepare you for uncertainty, I can't promise you your net worth is always going to go up, but I can promise you that whatever happens, if you need money, you're going to have some smart funds available to you. And I do that because I prepare for uncertainty, not because I'm good at predicting the future."
FPA: You write in the book that too few of us cautiously and consistently align our financial decisions with our values. Why do you think that is, and how do we remedy it?
Lennick: Well, one of the reasons I think it is, is because money (and having more of it) sometimes accidentally becomes the goal. I think a lot of people just don't understand why they do what they do, and as a result, they don't know exactly how to do what they do on a more ideal level.
People don't know that their experience is stimulated from the outside. So something happens outside of ourselves, such as a market decline or a hot market like we had in the 1990s. When those events outside of ourselves happen, they will stimulate us emotionally first, and the brain is wired in such a way that when we get emotionally all wound up-whether it's because we're really scared or anxious or because we're really excited and exuberant-we will begin to make mistakes. We will begin to become what Greenspan called "irrational."
And we've all experienced that. We get irrational. You get so angry you can't think straight, or you get so scared you do something, and the body, the physiology, the brain, is actually contributing to that happening. When people reflect on their values after they recognize "I'm a little too emotionally charged up," it helps put them in a better emotional state, which puts them in better physiological state, which in turn gives them better access to clear thinking. And so then we don't do things that are out of irrational fear or out of irrational exuberance.
FPA: What life lessons have you learned that have helped you make values?based financial decisions?
Lennick: I've done a number of smart things, and I've done a number of dumb things, and what I've learned from the dumb things is that as smart as I've always thought I've been, I am biased. And I've learned that humans are biased and behavioral finance helps us understand that.
I have the confirmation bias; I prefer input that confirms my position. And as a result, I have made some mistakes. And biases, really by definition, are predispositions to error. And so I've made those errors.
So part of why I've done this [book] is I've learned from my own mistakes. I've had some significant mistakes that have cost me a fair amount of money, because I wasn't really paying attention and I was too emotional, too excited. You know, most of my mistakes, interestingly enough, have not been made when I've been scared, but rather when I've been too excited or I've been too optimistic.
FPA: In the book you write about a simple four?step process for increasing your ability to make smart financial decisions based on values. Can you tell us a little bit about the four Rs?
Lennick: It's a four?step process that allows us to develop four skills. There is one principle, there are two rules, and there are four skills. The principle is responsibility. The rules are: always prepare for the certainty of uncertainty, and always make your financial decisions after first reflecting on your values.
The four Rs are the skills that we need to develop in ourselves. As advisers, we need to develop these skills so we can better support our clients.
The first R is recognize, and it really is that moment of recognizing what is going through my mind: what are my thoughts, how am I feeling emotionally, what's happening with me physiologically, and what am I doing? As advisers, we also want to master recognizing the experience of our clients, so we need to understand what they're thinking and how they're feeling and what's happening with them.
The second R is reflection. The most significant thing one should reflect on is their values, and along with that, the big picture. When people think about and reflect on what's really most important to them, they begin to have a different perspective on life than when they're thinking about the market having taken a downturn or a stock having gone way up, and it allows them to avoid what could be called fearful behavior or greedy behavior.
The third R is to reframe, which is the skill of reframing your thoughts. Framing is a psychological term used to explain how we are describing a situation, and this mental description, in essence, is our self-talk. So reframing is changing that self?talk. A lot of times, our self?talk is, quite frankly, self?destructive, and reframing allows for us to make that talk more constructive.
And then the fourth is to respond; I need to make a decision. Sometimes the best decision is to do nothing, so I don't always have to decide to act. Emotions want to stimulate us to action, but sometimes the best response when it comes to our money is to not do anything right now.
Some of the programs that we listen to or watch on TV are trying to get us real emotional so that we hurry up and make a decision. We actually don't want to make hurried decisions with our money. When we think about it, money decisions tend not to be life?and?death decisions.
If I'm going to get hit by a bus if I don't get out of the way, then it's a good thing to jump, and the fear that I have is well-founded and it will stimulate constructive behavior. But if I get really scared because the market is at a historic low or has gone down for several months in a row, then all of a sudden out of my fear I decide I had better run to safety. Witness the behavior of investors in 2009-even with the help of advisers, and sometimes because of the help of advisers. Investors were moving money from what really were sound, long?term equity investments into cash or fixed instruments, and what they missed was a 60 percent upturn in the market.
Learn More
Financial Intelligence: How to Make Smart, Values?Based Decisions with Your Money and Your Life by Doug Lennick is available in the FPA online store at www.FPAnet.org/FPAstore.
