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The Advisor Who Knows His Client Best Results In a Win Win Outcome


Highlights of an interview with ThinkAdvisor September 12, 2019


Financial decision-making is a challenging, complex puzzle of balancing goals, limitations and trade-offs. ThinkAdvisor recently interviewed Shachar Kariv, an economics professor at the University of California, Berkeley, and a leading decision theorist. He joined the university in 2003, the same year he received New York University’s Outstanding Dissertation Award in the Social Sciences. His paper showed that herd behavior is a mentality that often generates stock market booms and busts.


The way to scientifically discern investors’ attitudes about risk and other money issues, Kariv says, is to use a method that models clients’ choices and simulates the investing experience.


To know oneself as an investor, do you need the help of a financial advisor?

Absolutely. If someone thinks we can provide good financial well-being by eliminating financial advisors and make them go to robos [advisors], that’s not the way. Financial decision-making is becoming more complicated. Providing financial well-being is as important as providing physical well-being — medical care. I’m holding advisors to the same level that I’m holding physicians.


What goes into knowing yourself as an investor?

It’s knowing your goals, constraints and preferences. Financial decision-making is a very complicated puzzle consisting of balancing those three pieces.


Please elaborate.

Goals can be “I want to retire” or “I want to renovate my kitchen.” Constraints can be how much money you earn, current health and future health [issues] that you can’t anticipate. Preferences are [tradeoffs investors need to make]: risk vs. return; whether you want something today or are willing to wait till tomorrow; and whether you want to leave money to [for example] your kids. To figure out those three pieces of the triangle, we need a professional to help us.


Please talk more about tradeoffs.

All financial decisions are governed by those three tradeoffs: risk vs. return, today vs. tomorrow, you vs. others — that is, my well-being vs. the well-being of others.


How important are tradeoffs in making financial decisions?

Very important and very complicated. For example, when someone buys an annuity, they’re removing risk because they get a guarantee and a stream of payout in the future. However, you need to pay for the annuity now. So that’s a tradeoff between today and tomorrow. There’s a risk vs. return tradeoff as well: When you buy an annuity, you eliminate longevity risk, but to know your longevity risk is impossible.


The positives about annuities are attractive, but an annuity may not be right for every client, right?

Annuities can be good products. The advisor really needs to know the investor. To tell someone that if you buy this annuity, we’re going to give you guaranteed income of $8,000, you need to know the investor — and the investor needs to be convinced that the advisor knows them [well] enough.

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