4 Financial Advisor Lessons From The Psychology of Money by Morgan Housel

advisor book review communication

Let’s look at how financial advisers can become better at our craft and also improve our business using five concepts from the book, “The Psychology of Money” by Morgan Housel.

The concepts in the book are related to how we can better serve our clients, how to communicate better, and how to create successful financial planning strategies. I’ll go over the top takeaways that I got, and then share a story about how I was able to use it in a conversation with a prospective client to help him see and make the right decision.

Lesson 1: The power of time

Lesson number one is related to the power of time. The quote is “time is that the friend of the wonderful company, and the enemy of the mediocre”, which I actually think is a Buffet quote in the book. First, to apply this to younger clients, this quote highlights the power of time when it comes to investing and wealth creation, and speaking to younger clients, we’ve seen the charts and examples of how just a few years difference in extra savings, or starting a little bit earlier can compound and really make a huge impact on the end result.

It’s also useful to remind our older clients about short-term thinking versus long-term thinking. Like that Carl Richard sketch of five days compared to five years. Remember, as financial advisors one of the greatest values to your client is to be able to remind them of the right concepts that have worked over time. The weighted evidence of history that has worked over time.

Application changes depending on age

The same thing can be applied to older clients in a different way. It’s common for us to bring up with clients who are retired or going into retirement that time doesn’t always equal money. We know the saying of time is money and time is money. But time to them, and really to everyone should be infinitely greater than money. Especially as you get older, that scarcity of time gets more and more real every year.

This is helpful to say to clients because they, especially DIY investors and planners, can really learn all their investment strategies and all the planning strategies, monitoring, and adjusting themselves. Or they can hire professionals so that they can spend their time doing what they truly enjoy.

Lesson 2: Short-term thinking vs long-term thinking

Another lesson from the book is in a similar vein, and that is the dangers of short term thinking. The quote from the book is “our emotions drive our decisions about money, but our emotions are terrible at telling us what’s good for us in the long run.” This highlights the dangers of short-term thinking and the benefits of long-term thinking.

So advisers can use this lesson to educate clients on the importance of having that long-term financial plan and avoiding impulsive financial decisions driven by short-term emotion or things happening in the news right now. One of the best ways to do this is through awareness.

Decisions are both emotional and financial

Early in the relationship we remind clients how every financial decision is part an emotional one but also financial and we’re really we live at the intersection of those two. We can explain the straight financial result of a decision but we also know that sometimes it doesn’t matter that much. Reminding clients of this can be helpful through scary markets or big decisions. It helps them zoom out and really think about their next best step.

Lesson 3: Psychological biases

Another lesson from the book is on the topic of psychological biases. The quote is “we like to think about our decisions and decisions about money based on rational thought, but often that's not the case.” This is related to the previous lesson. The quote is highlighting psychological biases that influence financial decisions.

Some examples of these biases are the overconfidence bias, or a loss aversion. They are incredibly strong factors in the decisions to make financial decisions. Advisers can use this lesson from this book to encourage clients to think critically about financial decisions and avoid letting emotions drive their choices.

Lesson 4: The power of storytelling

The next lesson is the importance of diversification, which we’ve heard before. The important thing here is not just to state the facts but to use stories. To encourage and adopt well diversified portfolio, and why that’s so important as well as how to avoid making hasty decisions during ups and downs. It’s all about stories.

One of the most powerful things we can utilize in our conversations is that powerful story or the anecdote, that communicates a lot farther than just straight facts and figures and charts. It’s so important to have examples or stories you can have your quiver of frequent things that happen, questions clients bring up, or worries or concerns you can address. The stories can really hit home with people.

Planting the seed with story

As an example, the last few years, back in 2021 clients were asking about bitcoin a lot, or talking about small cap tech stops or meme stocks. Those may fit into a portfolio but a lot of people were thinking about allocating bigger percentages. So there was actually a prospective client who called me not long ago. He had over $5 million and was invested 100% into one high growth tech stock. The interesting thing he said was that he didn’t want any investment help, he just wanted tax planning and withdrawal strategy. He said “don’t talk about investments I got that figured out.”

Now, I wasn’t gonna convince him on the first phone call to think about changing his investment plan, so all I did was just tell him an anecdote about someone other than him. I had a story about somebody else. I said, you know a lot of clients come to us and they’re starting to do some research and looking into more of the tax planning in the income planning kind of like you are. But as they start looking into this and the retirement strategies, they begin to realize what it took to be successful the last 30 years of their financial life looks a little bit different now moving into the next 20 years.

It’s not just about the savings rate, or accumulation, or growth rate, it’s more about how do I pay the least amount of taxes with my withdrawal strategy. And how do I add more certainty and more predictability to the next 20 or 30 years as I start to make withdrawals. So the story I shared with him made him say “oh yeah, I can see how it is different. I see what you’re saying.”

This was a plant-the-seed moment. I wasn’t gonna convince him to not be 100% invested in that one stock yet, but this was a good moment. I wasn’t condemning him, telling him all the problems of what he was doing. I was just telling a true example about what other people have done. And that’s a powerful story.


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