Financial Personality

Financial Education in Turbulent Times

My last couple of blogs have really hit on the issue of financial education to develop greater financial capability for the consumer. Why am I harping on it more? Yes, it is my passion and the core of why Financial DNA was developed. However, the need is now “red hot” with the financial markets in turbulence and many people very concerned about how they will unwind. Are we at the lows yet? It would not seem likely. So, there is potential for a lot more concern and emotion yet.

The question becomes how will you behave in these turbulent times? What decisions will you make? How will you make them?

Every one has emotions. Further, nothing more than money can trigger your emotions and cause you to make irrational decisions. The key is to have greater self understanding of your emotions and propensities to making financial decisions. Also, it is important that you stay focused on your life purpose. This may sound lofty and big picture. However, your life purpose is the foundation of your goals and your wealth creation strategies. I have always seen that those who stay focused on their life purpose are the ones who make it through turbulent times and manage their emotions.

Remember that 5% of your wealth will come from investments and 95% from your behavior. So, understanding your behavior will get the results in the end.

So, what is the next step? Get more of the right financial education and become financially literate. The focus of this education should clearly be to become more educated about who you are and your life purpose. The Financial DNA purpose and that of our Wealth Mentors is to provide you with this education. Ultimately if you are interested in preserving your wealth in turbulent times then this is the best strategy out there.

Knowing Self Increases Financial Capability

Core to my passion is seeing people take more personal responsibility for their financial decisions. In the end this is actually key to your financial success, and overall quality life. To take more personal responsibility means increasing your financial capability. I believe there is an obligation on yourself to get the right financial education and also on your financial advisors to help you by providing it and guiding you. In the end, you need to be able to make more informed choices about the products and solutions you are buying, and not just rely on others to decide for you.

At the moment the regulators in the countries which lead financial planning such as the USA, Australia, the Netherlands, Singapore and Ireland are pushing the consumer financial capability point hard. Just recently, the Irish Financial Regulator released a “Preliminary Report on Financial Capability in Ireland June 2008″ based on extensive consumer research.

The key point that is coming out of the Irish report is that you as the consumer must develop your skills, knowledge, attitudes and behavior. To me this goes to the very core of the Financial DNA Discovery Process. To educate you about your financial behavior and to provide a framework for your financial advisor to guide you. What you will find is that when you go through Financial DNA the increased knowledge and emotional comfort will make you more confident in the decisions made. As you make better decisions success will build more success.

There is interesting research from the University of San Diego which says: 5% of your wealth comes from investments and 95% from your behavior. So what should be the core of your financial education? Learning more about products or yourself?

If you would like to see what you can learn about your financial behavior then click here. Also, you can participate in Financial DNA by clicking here.

Discover Your Investment EQ

The most common cause of low prices is pessimism It’s optimism that is the enemy of the rational buyer.
- Warren Buffett

Ask a group of investors to share the secret to successful investing, and youre likely to get many different quantitatively focused answers, ranging from, hold for the long-term, diversified asset allocation, quality research to the much touted buy low, sell high mantra.

However, recent research into the human mind has found that the secret to success in any long-term endeavor, whether it be in business, relationships or investing, is an attribute called Emotional Intelligence (otherwise known as EQ). EQ is a type of intelligence thats significantly different to the standard IQ-based definition of smart were all used to. The topic of EQ has received significant coverage in the business world in the last few years, fueled in particular by Daniel Golemans books which are aimed at helping business people use the skill to further their careers and effectiveness.

Following the four facet Goleman model for EQ, the emotionally intelligent investor would, for instance, make investment decisions calmly based on a higher consciousness of who they are and with a positive personal relationship to money (the first facet of self-awareness). This is instead of making decisions based on an emotional impulse which sabotages their financial position. They also handle stress, disappointment and uncertainty more rationally, and dont allow those feelings or circumstances to control or initiate their decisions (the second facet of self management).

Going further, the emotionally intelligent investor would also understand the emotions of others such as their partner, spouse or family members, recognizing them and responding with empathy (the third facet of social awareness). Finally, a person with high Investment EQ would have the ability to maintain quality relationships with others around them when making investment decisions knowing how to, effectively and appropriately motivate them and manage their money energy using subtlety, delicacy and tact (the fourth facet of managing others).

But the role of EQ in investment has been little publicized, even though its application can be invaluable for investors. Whether this is because the investment process is seen as an objective, numbers-based, non-emotional process, or whether the investment industry has simply not been made sufficiently aware of the existence of EQ, is unclear. Certainly, we believe that both a high level of EQ, combined with sound financial knowledge, strategy and advice, can make the difference between great investors and the also-rans. But sound financial knowledge will not do it alone.

So why is understanding Investment EQ so powerful? It is the ability to give a person enough confidence, focus and rationality to remain committed to their strategies even when the market value of their portfolio is declining, not living up to expectations, or being superseded by other strategies. Investors with a high EQ, in the long term, worry less about their investments, reap higher returns, and make fewer mistakes.

Daniel Goleman, with his co-authors Annie McKee and Richard E. Boyatzis wrote in Primal Leadership, Negative emotional surges can be overwhelming; theyre the brains way of making us pay attention to a perceived threat. The result is that these emotions swamp the thinking brains capacity to focus on the task at hand, whether its strategic planning or dealing with news of a drop in market share. For investors, the perceived threat, whether it be sluggish investments or a drop in portfolio value, causes the brain to be overwhelmed with negative emotions. Without EQ, or an awareness and ability to manage these emotions, they can and do cause havoc for individual investors, and on a larger scale, for investment markets generally.

Its a reasonably well-documented fact that chasing last years great performers is a poor investment strategy. However, thats how many players in the investment game, even seasoned investors, have made decisions. How often do you see investors with a strategy then not stick to it? It hurts to see someone else doing better than you are, it hurts to see your portfolio performance lagging behind the investment of the moment. Its not the feeling of hurt per se that causes investment damage, but allowing it, even subconsciously, to determine your next investment move.

Emotionally intelligent investors are like the patient driver, sticking to their lane. This doesnt necessarily mean that theyll put up with a poor investment past its used-by date. However, because they have researched their strategies thoroughly, invested in asset classes they understand, and undertaken the volatility level they know they are comfortable with, these investors are able to operate above the emotional level, sticking to their plans unless there are reasonable and rational arguments to do otherwise. They take time to rationally consider their past successes and mistakes, and analyze possible consequences before making the deal.

However, emotionally unintelligent investors often let fear or panic take control, and are more like the aggressive driver, switching lanes whenever something more profitable comes along. They are often after the quick kill, looking for that one deal that theyre going to be able to talk about for years to come, even if this desire is subconscious. These investors often commit to investments they know little about or are not suited to, and when things dont go as planned, panic and confusion sets in ? the worst possible state of mind in which to be making investment decisions. This is certainly not a deliberate strategy, but when our brain chemistry reacts to danger, it causes us to become emotionally charged ? a fight or flight reaction.

Another dangerous trait of the emotionally unintelligent investor is that theres a high likelihood he or she possesses an inflated ego. Research shows that most investors believe, even subconsciously, that they have an edge on others in the market, that they have better intuition than most players and that their technique, whether it be watching stock indices, predicting the behavior of businesses or CEOs or taking the pulse of the investment community, is inherently better than those techniques employed by others.

Ask most players in the investment game which investor they would most like to emulate, and there are good odds that most of them would answer Warren Buffett. Buffett is a prime example of emotionally intelligent investing. His success, in his own words, is not a result of academic-style intelligence, luck or intuition, but rationality, a key factor of EQ. It was this rationality that keeps Buffett committed to his strategy. During the tech bubble, Buffett was widely criticized for not investing in technology stocks, despite their meteoric rises. His rationale was that he didnt understand them, so he wasnt going to invest in them ? an approach that caused more than one of his critics to label him irrelevant. But even if tech stocks hadnt had their dramatic rise and fall, from an EQ perspective, Buffett still did the right thing ? he stuck to his very rational and logical guns ? guns which he knows intimately.

Discovering Your Financial EQ

The good news is that your Investment EQ can be developed. The starting point is with you learning more about your Financial DNA. The following steps will help you with developing your Investment EQ:

? Using the Financial DNA Core Life Profiles, understand and accept your natural instinctive propensities to risk. This will provide very predictive insights into how much uncertainty you will be willing to bear over the long-term and hence how committed you will be to a long-term strategy particularly, when under pressure.

? Then complete the Financial Directions Profile to understand the influences of your environment, experiences and education on the preferences you have for making investment choices. There will be investment strategies which you will have a greater aptitude towards based on what you have learned, whether they be in the stock market, managed funds, real estate/property or with other investment classes.

? Then analyze the Financial Behavior Analysis which documents your complete Financial DNA. This involves reviewing your level of investment alignment by comparing your natural instinctive propensities based on how you are hard-wired to your learned preferences.

? Another important step will be comparing your Financial DNA to the good and poor financial decisions you have actually made in the past. This will help you pinpoint the investment decisions you will be comfortable in making and to identify areas where greater investment education is required.

? Finally, use this behavioral knowledge of your Financial DNA to help you become personally aligned and become more aware in an overall life sense of what decisions you will be comfortable with. The overall dynamics of your life will impact every investment decision and the lives of others you have relationships with.

For more insight into this topic, please read Hugh Massie’s book:
“Financial DNA – Discovering Your Unique Financial Personality for a Quality Life”.

Money Influences Leadership

In recent weeks I have been doing some leadership development consulting and coaching. The goal of this work has been mainly to help the leaders to build their emotional intelligence and then generally their self awareness of what is driving the decisions they are making.

Typically, most leadership development work of this kind focuses on the person’s behaviors, experiences, the influences of the environments they are in and have come from, their skills and knowledge, and even their states of consciousness. All with the goal of helping the leader understand themselves better and becoming more empowered. Then there is also training on specific leadership methodologies and strategies. None of these factors are to be underestimated as being unimportant, because they all are.

However, there is one factor often missing from the discussion — and that is money. The reality is that the topic of money is missing from the coaching agenda full-stop. Why? Talking about money can be a very emotionally charged issue for both the leader and the consultant/coach. Many people are, when it gets down to it, mystified by money and the power of its impact.

The reality is, money is directly or indirectly wrapped up in some way with every decision that a person makes, and is therefore a very powerful influence. Leadership decisions are no different. You only have to look at some of the decisions made by leaders in the last 10 years and see the devastating outcomes resulting in spectacular corporate collapses, insider trading, bankruptcy. Also, the great corporate performances can be attributed to a healthy money attitude.

Yes, money can be the carrot to incentivize performance, but it can also be the driver of warped decisions. Lets not say all of the bad decisions are deliberate because they are not. Some of them are caused by blind spots or put in another way, a simple lack of awareness.

Nevertheless, the point is that your perspective on money, whether conscious or not, influences your leadership – the decisions you make, the goals you set, action plans, how you manage yourself and others and so on.

So, reflect on how your leadership is influenced by money. Perhaps understanding your own relationship to money will improve the quality of your leadership, corporate results, and ultimately your life.

Advisor-Client Chemistry

Do you have the right clients? This is a very topical issue for many financial planners, particularly those who have already built a business to a reasonable level. Actually, it is as important as the client selecting the right advisor.

In the end there must be a mutual relationship with the parties comfortable with each other. The relationship cannot start out (but it often does) with the client simply having dollars in the bank account and some financial planning needs, and on the other side the client believing the advisor has the skills and the necessary integrity. In fact, these are all assumed to get to the point of the first meeting. Bob Veres of Inside Information (www.bobveres.com) has written a great article this month called “Segmentation or Bust” mainly directed at advisors to consider the structure of their client base.

Our business is all about looking at the behavioral style of the clients and also the advisors. So, not unexpectedly, the approach we take is to match clients and advisors based on their behavioral style. This is very much an inside-out approach, however all great relationships start below the surface. Human behavior is at the core. The great thing is that the Financial DNA system measures natural behavior which means we can reliably predict the behavioral style of the advisor and client in terms of how that person will always be, particularly under pressure. I would say that our approach must still be blended with a number of other more traditional selection factors such as client size, service style, values, expertise, etc. that are mentioned in Bob’s article.

To help the advisor we have developed an Advisor/Client Compatibility Matrix. The matrix is a one page grid which matches profile styles based on the level of modification that will be required between advisor and client. To be clear, it does not say you cannot work with someone, but it does say who will be easier (green box on the matrix) based on less behavioral modification – this is where communication, chemistry, etc. is likely to be higher. Hence, this is where the relationship will be naturally more sustainable over a longer period with less stress. So if you are an advisor wanting to segment your client base a reliable starting point is now provided.

I do not necessarily advocate that you fire those clients who will require more behavioral modification (red box on the matrix). This will be a warning sign that you have to put more work into adapting to maintain the relationship. Although what you may wish to do is allocate these clients to a partner who is different to you or hire someone who is different to you to provide a complementary style. Many advisors have found this approach to be foundational for selecting their next hire. Or in how they deliver client service with a team-based approach. Hence, the planner may get the relationship started and then another person on the team steps in.

Are you interested in the value of your practice? Importantly for advisors, this approach also helps you to identify to whom you sell your business. The sustainability of the relationships and hence the revenue is critical to business value.

The Definition of Retirement is Changing

What is your definition of retirement? It might be good to think about that a bit. Do not just listen to the “noise” out there about what it means or what others are doing. Focus on you and who you are. You may just be surprised what retirement really means in the context of your life. The key point is that the definition of retirement will depend on your unique financial personality – how you are uniquely wired to make life and financial decisions. In effect, your financial personality will shape how you see life and deal with the retirement question. Whatever stage of your career or life you are at, addressing this question will be very liberating.

In recent times we have started to do a lot more work with the executives of corporations. In particular, we are delivering Quality Life Programs to executives participating in 401k plans. An interesting trend emerging is more and more executives are starting to realize that retirement does not necessarily mean they have to stop work. The point is, the definition of retirement is changing. A friend of mine who is a senior executive with a large fund manager providing retirement services and products to executives, said he is seeing the same trend of people including work in their definition of retirement. In fact, the discussion that their company has with executives is now becoming much more focused on getting each person to define what retirement means for them. Our focus is similar, bundling the question of retirement up with what is a “Quality Life” for you, again recognizing that this is different for everyone.

Another person recently said to me that their definition of retirement is “Doing what you want, when you want and with whom you want”. I thought that was a great one and truly resonated. How much freedom can you get from this type of thinking? Frankly, it is a lot. The person who said this was actually still working, the point being he is now in a role he loves to do every day. When you get this pinpointed it is amazing how you then find yourself around the people you enjoy being with, and managing your working schedule becomes easier. Again, the key is getting centered on who you are by addressing the retirement question from the inside out.

Even if you are a long way from the traditional retiring age of 60 or more, you can still address the question because the answer will shape a lot of career and life choices and hence your financial planning.