Story People

Recently, I was wasting some time on the Twitternets. I came across the following exchange:

Every single academic study ever done has concluded that REITs outperformed private real estate investment. – Dr. Brad Case

— Blair H duQuesnay (@BlairHduQuesnay) June 21, 2018

Interesting. Please forward the research

Not surprised though. More and more research is questioning if private investments have consistently outperformed, especially when true net cash on cash returns are used (no investor receives IRRs and they can be misleading)

— Preston McSwain (@preston_mcswain) June 21, 2018

What happened here? Blair duQuesnay shared an interesting tidbit about investing. To which Preston McSwain responded:

Show me the numbers!

And I while I’m fascinated by Blair’s story, Preston – in my opinion – had the appropriate response.

Two Types of People

I’ve been in the financial planning world long enough to have learned a few things. One thing I keep coming back to is how people look at numbers – if they even look at them at all.

That is, most people don’t look at the numbers. That’s because most people aren’t interested in numbers. Most people are more interested in stories.

Being interested in stories is what makes us human. And for that reason, story people are rather regular people. They’re normal people. Story people are well-adjusted social creatures that get along well at parties and dance recitals.

Most people are story people. And, of course, story people love a good story.

Bitcoin rocketing to the moon making you rich. That’s a fantastic story. Who doesn’t love that story? (Hey, even I love that story!)

Being a hedge fund investor? Freaking fantastic story. To reference an over-used reference, discussing your hedge fund investment is great cocktail party chatter.

Dividend stocks paying you cash for a comfortable retirement? That’s a very comforting story. Who doesn’t want cash to enjoy a comfortable retirement?

Many people are drawn to the above investments – regardless of the true merit of those investments – because those investments can be housed within a great story.

Numbers People

On the other hand, there are numbers people. And these are strange people! Numbers people ask inappropriate questions at social gatherings. Numbers people seem to be obsessed (and not in a good way) with the stuff that normal people don’t seem to care about.

Numbers people are few and far between. This is – by definition – what makes them weird. It’s because numbers people are in the minority.

A Story Person Pretending to Be a Numbers Person

Here’s a tale from years ago:

I hadn’t seen my old friend in a decade. I reached out to him because I knew he was in financial services – a field I was contemplating moving into.

My old friend worked for MetLife. For his job, he scoured Los Angeles school campuses sell annuities, permanent life insurance, and other high-fee nonsense to unwitting, hard-working instructors of America’s youth. #NoJudgment #ActuallyLotsOfJudgement

About three minutes into our conversation, my friend made a case for me buying a whole life insurance policy to “protect” my at-the-time girlfriend (now wife). Remember, I hadn’t seen this guy in ten years!

There is an obvious problem here. And anyone who knows anything about permanent life insurance knows that – for the most part – these things are complete garbage. Why are they garbage? It’s because of the numbers behind them. The numbers aren’t good! But, my old friend wasn’t selling the numbers on this policy. He was selling peace of mind. He was selling a story. He had to sell a story – and not the numbers – because:

The numbers on these policies are complete garbage (for most people, anyway).
Numbers don’t mean anything to most people.

Numbers don’t connect with most people because most people aren’t numbers people. Most people are story people.

So, if you’re a story person, you want to hear is:

This life insurance policy will protect your family.

What doesn’t land with a story person is:

The after tax-return of this product commands a two percent premium over U.S. equites.

Of course, the above investment returns aren’t true anyway. But that’s not the point. The point is that the investment returns are what a numbers person would pitch and would be interested in hearing.

The Journey of the Commissioned Salesperson

Decades ago, countless people signed up to sell garbage investments (like high-fee annuities and whole life insurance) to their friends, family and anyone else who would listen. These would-be salesmen were both numbers people and story people. Fortunately for everyone, most of the people who signed up to sell garbage didn’t last. (If you know anything about this industry (commissioned financial sales), you know the drop out rate is high. Perhaps only 10% of folks that sign up to be a commissioned financial salesperson actually stick it out.)

What sort of people succeded as commissioned salespeople? The story people! Succesful salespeople – especially those selling garbage products – are story people. Succesful salespeople know how to tell a good story that lands with fellow story people. As a result, the financial services industry (or rather commissioned sales industry, if you can make the distinction) were dominated by story people.

In that era, if you wanted financial advice, you’d go to a story person. That story person would then proceed to sell you a piece of garbage. But, you’d buy that garbage because the story person selling the garbage told a great story. (At least, you’d buy the garbage if you were a story person.)

The Rise of Low-Cost Investing

As time went on, more and more numbers people became wise to the high-fee industry – and opted for financial advice that was numbers-based. Story people joined them. Story people probably joined because the liked the liked the story of:

Do this so you won’t be ripped-off.

So, now everyone was moving towards investments that made sense – investment based on numbers, and not stories.

This was bad news for the story people selling garbage investments, the commissioned salespeople. Since the commissioned salespeople saw what was happening, they decided to do something about it: they re-branded themselves as fee-only investment advisers.

The commissioned-salesperson-turned-fee-only-investment-advisor threw off their relationships with MetLife, Wells Fargo, and AXA. They launched their own fee-only financial planning business. And, these former commissioned salespeople took all their clients from AXA, MetLife, and Wells Fargo, etc. with them to their new independent investment management firms. The re-branded advisors wouldn’t sell garbage anymore. Instead, they managed money for a fee.

Once a Story Person, Always a Story Person

Unfortunately for the clients of these re-branded advisors, a leopard doesn’t change its spots. Once a story person, always a story person. (Or at least, that’s what I’ve seen.) This means that the clients of these re-branded advisors are still receiving investment advice on the basis of neat-sounding stories – and not good numbers.

What does investment advice based on a good story look like? Allow me to share some real-life examples. These are things that actual fee-only investment advisors have said or done with 100% confidence:

“Small caps have been on a tear! Now is the time to get out!”

A former AXA salesperson. This strategy from a practicing fee-only investment advisor, from late 2013. Had you made this move in late 2013, you would have missed out on investment returns of more than 12% per year. Because that’s a big deal, I need to say it again: 12% per year.

“IBM’s Watson is going to change the world!”

Same guy. Also dead wrong. For the last five years, IBM lost more than quarter of its value. The S&P returned more than 70% over the same period.

“We’re going to generate some nice capital losses.”

Same firm as the above, different guy. A capital loss means you lost money. Last time I checked, losing money is the opposite goal of investing.

Using structured notes.

Different guy. Different firm. This time a former Wells Fargo advisor. Anyone who uses structured notes doesn’t understand math. More likely, anyone using structured notes hasn’t even bothered to look at the terms of the note. Can I interest you in:

Limited upside, but also the chance to lose the entirety of your investment.

What’s wrong? That doesn’t sound like a good deal to you? Obviously, you’re a numbers person.

“If this manager underperforms, we’re going to fire him.”

Different guy, different firm. Firstly, if you’re using active management, you’ve already screwed up. That’s because the odds dictate that advisors can’t make up for the fees they charge. But, even if you did manage to find a truly exceptional manager, you don’t fire them when they’re underperforming. (Or at least that’s what one of the greatest investors of all times says). Investing 101 dictates that if you’ve done your homework and truly found a worthwhile investment, you invest more – not less – when your investment declines in value. Then, you wait. Or at least so says a numbers person.

Our Job as Financial Planners

Since there are so many financial planners, a large number of them can be either

story people, or
numbers people.

But, I’d be willing to be that the financial planner population has a heavier concentration of numbers people than the general population. (Of course, that excludes the commissioned-salesperson-turned-investment-advisor.)

Insofar as financial planning clients, odds are that a larger number of your clients are story people. That’s for the simple reason that most humans are story people. (Of course, there are exceptions. Within the financial planning space, there is a popular consensus that engineers make terrible clients. This is likely because engineers are numbers people – constantly challenging financial planners on the stories they present to clients. Also, this popular consensus is most likely most popular among the sales-people-turned-investment-advisor. This is because it’s the sales-people-turned-investment-advisor who don’t understand the numbers, and thus are challenged by the engineers.)

Whatever your disposition as a financial planner (be you a numbers person or a story person), it is your job to:

Understand the numbers
Translate those numbers into a story for your financial planning clients – who are most likely to be story people. (Again, because most humans are story people.)

Understand the Numbers

“IBM’s Watson is going to change the world” is not a valid investment strategy. If you’re managing a client’s financial future, that client’s entire livelihood is dependent on your hard work. So, you have to do the hard work. You need to work to understand the numbers. That’s your job.

If numbers aren’t your thing. That’s ok. Outsource that process to a numbers person. But, make sure you are indeed a numbers person. If you’re using a TAMP that includes an allocation to hedge funds or has an aggregate expense ratio beyond 25 basis points for the underlying investments, you’ve fucked up.

Turn the Numbers into a Compelling Story that Resonates with Story People

This is hard (at least for me).

If you don’t save more/spend less, you’re going to run out of money.

This story doesn’t land with most people (because most people are story people). It’s not a compelling story. That statement won’t prompt a story person to action.

Fortunately, this is hope for us socially-inept numbers people. Creative folks like Carl Richards have found neat and tidy ways to translate complex data into simple stories.

If we as financial planners are going to make a positive impact in the lives of the people who are paying us their hard-earned money for our help, we need to understand the numbers and make those numbers into a compelling story to move our clients to action.