Many years back I was speaking with a relative about different options available for the $50,000 401(k) that he currently had with his old employer. He was concerned that he was paying high fees in this plan and he was also concerned that his mutual fund options were very limited. As we spoke I mentioned there were options out there like CDs, annuities, forex brokers south africa, stocks, bonds and mutual funds. As I began to ask questions about his risk profile, I did sense that maybe market based products were going to be the flavor he preferred. Therefore, I went into detail on various mutual fund companies, on different mutual fund styles and strategies like value funds, growth funds, balanced funds, blended funds, tactical management, strategic management, portfolio models, etc. After providing what I thought was a very well-articulated and very “impressive” explanation of all of the options, I looked at him and asked him what he thought. He then looked at me and said “what is a mutual fund?”
This was a learning experience for me and was the birth of my new way of thinking regarding how I worked with clients and agents. Once I changed my ways because of this “new way of thinking,” it immediately improved the way I connect with people one-on-one, as well as in large groups, when I discuss financial matters. This “new way of thinking” has been solidified for me over the years by working with clients and by hearing a million stories from small to seven figure income agents. What is this “new way of thinking?” Simplification!
Although this notion of simplification may seem like common sense to a financial professional today, I don’t think it has always been the case. I believe that at one point in time, like the late 90s for example, consumers, as well as much of the financial services business, believed that there were financial professionals that were so intelligent that they had it all figured out. It was thought that these financial professionals knew which stocks to select to make their clients unbelievably wealthy. By the way, in the late 90s those stocks were usually tech stocks that a monkey could have picked. Or, if a client was working with a financial professional that was not a big stock picker, then maybe that financial professional, because they were so brilliant, could construct a beautiful asset allocation model comprised of domestic stocks, international stocks, REITS, gold, bonds, etc., and then profess how scientifically and mathematically perfect the portfolio was-how each of the components had nice negative correlations with the rest of the portfolio. And by the way, if that client “bought and held” this masterfully created portfolio and leveraged Harry Markowitz’ Modern Portfolio Theory, then in the end that client will be a multi gazillionaire. Also thrown into that sales presentation would be nice pontification on the “efficient frontier” to add to the validity. Of course I am being somewhat facetious to demonstrate a point; it did not matter how complex the language and models these technicians used, clients were very willing to listen to them because of trust-not so much in the financial professional, but rather in the markets. And why would they not trust the markets? After all, we had experienced two decades of raging bull markets!
By the way, although many of us do not deal with market based products, it is important to discuss the markets in this context because that is what drives, whether directly or indirectly, the behavior of our clients and thus the financial services business. In other words, I believe the mentality around the “markets” is the bellwether for our industry whether we deal with them directly or not.
Needless to say, those beliefs in the 80s and 90s have disappeared. Remember the “geniuses” of the hedge fund Long Term Capital Management that possessed PHDs and Nobel Prizes? They almost sank the entire global financial system. Remember tech stocks with triple digit PE ratios that didn’t work out? Or the big one-the “buy and hold strategy” that prior to the new millennium was often talked about? That did not work out well either, especially for those consumers that “bought and held” the S&P 500 for the first 10 years of the new millennium. The S&P 500 lost 22 percent over the entire 10-year period from January 2000 to January 2010!
Thus, times are different today. We have seen the traditional “beliefs” and “models” fail twice over the last 17 years. We are back to the basics. I believe that today clients do not expect us to be the Nostradamus of financial services. Nor do they want to be force fed technical information that they do not understand and where they have to blindly trust it will work. Today I believe clients want two simple things: The first is to understand and to make sense of their finances and the options available to them. The second is to have the feeling that the person that is making the recommendation is trustworthy.
What’s cool is these two needs are linked. In other words, a big part of getting #2 (trust) is by giving the client #1 (understanding and financial literacy). If I can teach somebody something they did not know they will view me as a credible resource. This is where we come in and where we are most needed! How badly are we needed? The National Institute on Retirement Security reports that 62 percent of workers between the ages of 55 and 64 have retirement savings that are less than their annual income. This is clearly not enough money for people nearing retirement. Furthermore, I believe the reason consumers are not saving more is not so much because they are lazy or unmotivated, but rather it is because they are not “literate”-not aware that there even is an issue. Here is another personal example:
On a recent Sunday morning I posted some of my “random thoughts” to my family and friends on Facebook. A post I thought was very simple and nothing Earth shattering. The content of this post is below:
“Doing some planning for a friend here and thought I would share some deep thoughts. If it helps one person, it is worth my time. The “rule of thumb” withdrawal rate for a 30 year retirement today is around three percent (technically 2.8 percent) from a stock and bond portfolio per Morningstar. This means in your first year of retirement if you wanted say, $75,000 in that first year of retirement and adjusting each year thereafter for inflation, you would need $2.5 million. Again, taking three percent out of that $2.5 million will give you your $75,000 in that first year and adjusting thereafter for inflation. Punching the numbers into my financial calculator, let’s say you are 40 years old and have not planned for retirement and you plan on going off into the sunset at age 65. How much would you have to save each year to get $2.5 million in 25 years? The answer to that question is over $39,000 per year based on a seven percent hypothetical rate of return! What if you are a procrastinator and you figure you will wait another 10 years until you are 50 before you start getting serious about saving? What is that “cost of waiting?” In that scenario it would require over $100,000 per year. The point is-save a lot, save early to leverage time and, lastly, having a million dollars is not that much anymore! By the way, if you are only 30 years old and decide to save today, it requires a little over $18,000 per year. Leverage time!”
Nothing real profound right? Well, the amount of feedback I received from this post was voluminous. No less than 15 or so of my and my wife’s friends made comments about how surprised they were with how large the numbers have to be once they retire and how small the “Rule of Thumb” withdrawal rate was today. They also had made comments about how they need to get busy with retirement. This is an example of what I mean when I say it is not as much about laziness as it is financial illiteracy.
To add to what I mean with consumers being financially illiterate: In 2016 FINRA released the results of a study conducted in 2015 entitled “Financial Capability in the US 2016” that posed the below question to 27,564 American adults:
Suppose you owe $1,000 on your credit card and the interest rate you are charged is 20 percent per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double?
(A) Two years;
(B) Less than five years;
(C) Five to 10 years;
(D) More than 10 years;
(E) Do not know;
(F) Prefer not to answer.
Only 33 percent of the respondents got the answer correct. The answer is B. This is fairly straightforward to many of us as we know without compounding at 20 percent per year it would take five years to double. When you add in compounding, it would take less than five years.
This study also asked a question of what happens to bond values when interest rates fall. Only 28 percent got this answer correct. The answer is, bond values increase.
For each of the respondents to this survey there were three additional questions, or five total, to round out the financial literacy test. How did the respondents do overall? Only 37 percent of the respondents could correctly answer four out of the five questions, which was the target for getting a “passing” grade. Almost two thirds failed. This “pass rate” of 37 percent was a decline from 42 percent experienced in a similar study conducted in 2009. The decrease in financial literacy is thought to be because of complacency as a result of the bull market.
Thus, increasing financial literacy is paramount. But in order to provide literacy we must do it in a way people understand, which sounds easier than it is. For those of us that have been in the business for a majority of our lives, we are living inside the jar. When you live inside the jar you cannot read the label on the outside. Many times what that label says is that we know too much for our own good and we need to distill it down. This complicated world of finance, insurance and financial products has become a part of our DNA. We are like the marathon runner that finds it hard to comprehend that there are people out there that cannot run three miles without stopping for a breather. We have normalized the financial intelligence that we possess and therefore fall victim to the assumption that others know that which is basic to us-but it is not so basic to the American public. This financial illiteracy that mainstreet America is plagued with is no fault of their own, it is the policymakers’ fault for not creating programs to enhance financial literacy. I also believe that the financial services industry should shoulder some of the blame. If every client in America was more welcoming of conversations with financial professionals, financial literacy would be much increased. Why don’t clients “welcome” conversations with financial professionals? I believe the core reason is because of the lack of trust that has been a result of a few bad actors committing fraud and financial abuse, stealing, and giving just plain bad sales pitches!
Do not normalize your intelligence. When you prepare to explain something to somebody, use a benchmark. For example, if I am going to speak with a 65 year old couple about financial issues, I will prepare a talk based on asking myself this question: “Would my mom and dad understand what I am saying?” Or, if I am preparing to talk with a 40 year old stay at home mom, I would ask myself this question: “Would my wife understand what I am saying?”
Think about this for a second. Take a friend or a family member you know who is 65 years old (and not in the business) and ask yourself these example questions using this “test person.” I also included some provoking thoughts for you to consider.
Question 1: Does he/she even know what an annuity is?
Thought: If not, why would you start a presentation by discussing all the attributes of annuity XYZ without first explaining what an annuity even is?
Question 2: Does he/she know what the S&P 500 is?
Thought: Have you ever discussed how an indexed annuity or IUL can give upside linked to the S&P 500 without even asking the client if he/she knew what the S&P 500 was? Maybe an explanation of the S&P 500 is warranted.
Question 3: Does he/she know what a GLWB is?
Thought: Never use acronyms!
Question 4: Does he/she know what the definition of “chronic illness” is?
Thought: Would you just go into a spiel about what a chronic illness rider would do for them or would you start out with what the definition of a chronic illness is first? I know what I would do.
Question 5: Does he/she know what universal life insurance is?
Thought: If you were doing an indexed universal life insurance presentation, would you even think of explaining first what universal life is? Or would you just jump right into IUL? Don’t assume they know universal life versus whole life versus term.
These are merely examples of random questions to ask yourself about your audience. With the ocean of knowledge many of you have, there are thousands of examples I could have used above. The point is, engrain simplification in your DNA and do not normalize your intelligence. Not everybody knows what you know but with time and the right communication methods we will make the country more financially literate!
References:
Financial Capability in the United States 2016
S&P 500 return numbers were gathered from Finance.yahoo.com
This material is intended for educational purposes only. For financial professional use only. Not to be used for consumer solicitation purposes. You should not treat any opinion expressed by Charlie Gipple as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion and experiences.
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