MARK RIEPE: On pretty much every weekday you’ll find me boarding a 6 a.m. train for a trip into San Francisco on the Bay Area Rapid Transit system, or BART for short.
The first serious proposal to build the BART system was made in 1946. It took 18 years before construction actually began. Once that first groundbreaking took place, the original system was finally complete by 1971.
The original story of BART is a contemporary example of something Aristotle observed 2,300 years earlier when he wrote that “The beginning seems to be more than half of the whole.”
That large discrepancy between the time it takes to simply get a project off the ground and the time it takes to actually complete the body of work, once begun, happens all the time. For example, I’ve seen it with bridges and airports in different parts of the country.
But don’t think that big government infrastructure projects are the only situations in which this happens. Individuals face the same challenges when it comes to getting their financial affairs in order. Today we’re going to discuss some of the issues that people have getting started on their financial to-do list.
If you’ve set some goals, but haven’t taken steps to achieve them, or if you haven’t looked at all the details of your accounts in years, we have some tips and strategies to help you get started.
And we’re going to take a look at some empirical data involving the goals—and the biggest concerns—of real investors in the hopes that these lists might spur some thinking about your own situation and what matters most to you.
I’m Mark Riepe, and this is Financial Decoder, an original podcast from Charles Schwab.
It’s a show where we study the cognitive and emotional biases that can influence your financial decisions. And we offer strategies designed to help you mitigate those biases and improve your financial life.
When it comes to creating a plan or setting goals, I’m not talking about the people who don’t even realize they have a problem.
I’m talking about people who know they need to do something. Either they realize they have no plan, or they sense that things are amiss and not on the right track.
I’m talking about people who they’re not quite sure what’s going on with their portfolio or in their financial lives—or what exactly to do to fix things.
It’s good that these people are concerned. As we’ve said many times on this podcast, having a financial plan is good thing. Schwab’s 2019 Modern Wealth Survey shows that more than 60 percent of Americans who have a written financial plan feel financially stable, while only a third of those without a plan feel that same level of comfort.
There are many reasons for being stuck and not actually being able to move forward.
The first reason is procrastination. We typically procrastinate when know we should perform a task, but the task isn’t especially pleasant. The costs of performing the task are immediate, but the benefits only accrue over time. Because of this, other tasks, which are more immediately rewarding, take on greater urgency. In other words, there’s a clash between our short-term preferences and our long-term preferences, and the short-term usually comes out on top.
There are two other reasons that aren’t really cognitive or emotional biases but nonetheless block progress and are worth mentioning.
For example, 46% of those who don’t have a formal plan don’t believe they have enough money to warrant a plan. And the last reason is that people just feel overwhelmed. In our Modern Wealth Survey, 31% of respondents said financial planning is just too complicated, or they just don’t have the time. In this episode we hope to provide a little inspiration to get you unstuck.
MARK RIEPE: Joining me now to discuss how real investors set goals and start investing is Cynthia Loh. Cynthia is vice president of digital advice and innovation at Schwab, where she leads the team responsible for defining the client experience for our digital advice solutions—Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™. Thanks for being here, Cynthia.
CYNTHIA LOH: Thanks, Mark. Great to be here.
MARK: We’re going to be talking a lot about data from real clients today, and this is data from what Schwab calls digital advice. Before we get into the details, why don’t you tell us a little bit about what is digital advice, what does that actually mean?
CYNTHIA: Yeah. Digital advice leverages technology and helps people to get invested and create a financial plan. At Schwab, there’s two ways to work with us. If you’re looking to purely invest, Schwab Intelligent Portfolios helps you build and automatically rebalance a diversified portfolio based on your goals. If you’re looking for a little bit more, we have Schwab Intelligent Portfolios Premium, where you get access to digital planning tools, as well as unlimited access to our certified financial planning professionals, or CFPs®.
MARK: The premise of this episode is that people, sometimes they will struggle to get started with investing and financial planning. They know it’s important, but they don’t know how to get started. Is that something your team has observed?
CYNTHIA: Oh, absolutely. Most people have at least an idea that they should be saving for short- and long-term goals, managing debt, investing for long-term growth, but the thing is, they’re intimidated. In many ways, where to get started with financial planning is shrouded in mystery. What is a financial plan? Where do you get a financial plan? How much is this financial plan going to cost? In fact, we did a recent Schwab survey of a thousand U.S. consumers, and we found that 55% of Americans, the vast majority, think that financial planning is at least as hard as training for a marathon.
MARK: That’s an amazing statistic. What’s behind that perception? What do you think is driving that?
CYNTHIA: I think it’s because the majority of consumers don’t know where to get started. Another interesting tidbit from the survey is that 64% of people said they’d spend more time investing if they just had easy access to a financial advisor.
MARK: It’s as if they don’t know what’s involved and they really don’t have anyone to turn to, so they just kind of assume the worst. Is that right?
MARK: The good news is that my brother has trained for and run a marathon, and he knows a lot about financial planning, and he can assure everyone that financial planning is much easier.
Before we leave this topic, though, I wanted to ask you about nudges. One offshoot of behavioral finance, behavioral economics, has been the concept that if you want people to make good decisions, you’ve got to make it easier for them, and nudging them toward the right path is one way of doing that. It seems to me that digital advice is really tailor-made for that. It’s really important because of that.
CYNTHIA: Yeah, that’s the beauty of digital advice. With the emergence of robo solutions, really over the last decade, financial advice has been democratized. It’s much easier to access digital tools, financial planning professionals. The additional benefit is that it’s much cheaper than it used to be.
MARK: Another premise behind this episode is that people who are having trouble getting going, they can learn from the experience of others. Your team has looked at data from thousands of financial-planning conversations with clients over the last few years, and that data has really revealed a lot about what people are thinking and feeling when it comes to investing. Describe in a little bit more detail where that data is coming from.
CYNTHIA: Yeah. Our premium solution offers unlimited access to CFPs, and so we’ve seen from these planning sessions a lot about clients’ goals, expectations, as well as concerns, across every age demographic. We’ve also looked at the top recommendations that our CFPs provide to clients and whether clients actually follow up and listen to the advice.
MARK: Everyone is a little bit different when it comes to planning. Some people, they frame the discussion around the goals they hope to achieve. Other people frame the discussion around their fears and concerns about their futures. Some people, you know, frankly want to talk about both. Let’s start with the concerns that people have for their futures. When you looked at the data, what were the top concerns that kept coming up?
CYNTHIA: Yeah, this is actually one of the most important roles our CFPs can play, figuring out a client’s concerns. What was most interesting to us is that actually across all age groups, the top two concerns were the same, running out of money and healthcare costs.
MARK: It’s interesting that those two came up the same for every age group. They’re both really important, but they’re also really vivid. We’ve done episodes in the past where people tend to be concerned about risks that they can easily relate to, and certainly running out of money and not being able to afford quality healthcare, certainly they both qualify. What are the next few concerns, and do they start to differ by the different age groups you looked at?
CYNTHIA: A little bit, but not nearly as much as you might think. Suffering investment losses, partner dying early, not having a paycheck, and getting Alzheimer’s are generally the next four biggest concerns. Their rankings differ somewhat across the age groups, but for every age group, these were relatively high.
MARK: You can’t pick up a newspaper or watch a news program these days without finding some discussion about how the generations are so different from one another, but when it comes to financial concerns, it seems that everybody is pretty similar.
CYNTHIA: Yeah, that’s right. It’s surprising, but across demographics, when it comes to financial concerns, people are alike.
MARK: The good news, though, is that the concerns you listed are exactly the sorts of things that financial planning is really designed to help with. Running out of money and suffering large investment losses, those are the sorts of things that every financial plan should address. How do you generate income from your portfolio when you’re not working? That’s actually going to be a future topic of a Financial Decoder. Even things like Alzheimer’s or diseases like it—obviously, financial planning is not going to cure those—but they’re real risks to the financial well-being of senior citizens. A good financial plan and planner, they should be talking to a client about how to put in place procedures to help with that should it happen to you.
But let’s go to the other side of the coin. What are the goals that people are citing most often when they think about their financial future?
CYNTHIA: Interestingly, travel is the number one goal for every age group.
MARK: I would have never guessed that. Well, what’s … one, is that actually true? And then, secondly, what’s driving that?
CYNTHIA: Yes, it’s actually true. It seems that there’s been a trend toward spending on experiences versus material things. You don’t need to own things anymore. You can Uber. You can rent a whole wardrobe if you would like. So I think that’s what’s causing the trend.
MARK: A home is one of the largest expenses most people have. How important were home-related goals?
CYNTHIA: Yeah, buying a home tied with travel as the most important thing for the under-35 age group, but it declined in importance as the age groups increased and was only important to about 5% of people over the age of 65. However, we got almost the mirror image of the results regarding home improvement. That was important to about 6% of the under-35 age group but increased steadily in importance as clients got older.
MARK: Another generational mirror image was seen with the goals of giving to charity and weddings. Could you talk about that a little bit?
CYNTHIA: Yeah. Only 2½% of clients under 35 ranked gifts or donations as one of their goals, and this grew close to 6% in the 65-and-over set. Conversely, 7% of clients under 35 ranked weddings as one of their goals, which shrunk to 1% in the over-65 group.
MARK: Despite the existence of Uber and Lyft, cars probably represent the second-largest expense for most people. But where did cars rank in terms of importance as a goal?
CYNTHIA: Yeah, buying a car was the second-most important for all groups 45 and over, even for the 65-and-over group. But further down the list, for the 44 and younger crowd, for those groups, buying a home was much more important.
MARK: So, we’ve talked about what people are worried about. We’ve talked about, you know, the goals that people would like to achieve. What kind of advice are the CFP professionals providing for clients? Can you share some of the data on the top action items or top recommendations that they’re making?
CYNTHIA: Absolutely. This one is tough because our CFPs really are able to talk about a broad range of different subjects, and all clients are different. But if you think about the top concerns—running out of money, healthcare costs, and the top goal across all age groups, travel—it will come as no surprise to you that the top recommended action item for our clients is to get their funds invested in a diversified portfolio. After getting funds invested, the next four recommended action items were creating a will, creating and updating a monthly budget, reviewing beneficiary designations, and lastly, confirming the amount of their Social Security benefits.
MARK: Cynthia, we know from the academic literature that when people are working on complicated tasks, frankly, many don’t finish. They get a push to get started—they’re pretty motivated at the beginning—but that motivation starts to tail off, and they don’t really finish everything that they were trying to do. How often is the advice implemented, and how can people follow through to really get to the end complete all the action items?
CYNTHIA: At least 80% of our clients complete one recommended action item, and based on self-reporting from clients, about 30% complete an average of four action items. When it comes to helping people follow through, we actually recommend repeat visits with our CFP professionals to ensure that clients can stay on track to meet their goals.
MARK: These are great results, because receiving useful advice, that’s a great way to get started, but if you don’t actually implement the advice, you haven’t really improved your situation.
One last question, what was the triggering event for these people to seek help? The reason I ask is that we know that many people, they could use some help, but they procrastinate or they don’t really know where to begin. Do you have a sense as to what caused these people to reach out and to get assistance?
CYNTHIA: Typically, clients experience a life event. Whether that’s getting a promotion, getting married, getting divorced, having kids—these are all events that can actually change someone’s life financially.
MARK: That’s really a great perspective because we all experience changes in our life, and while certainly money isn’t everything, people need to not forget that there are financial implications as they experience these events. This has been great, Cynthia. I really appreciate you coming by.
CYNTHIA: Thanks for having me, Mark.
Cynthia provided lots of great data, but one piece I found especially interesting: Many of the people who use digital advice do so after a life event.
That makes sense. Life events often change your circumstances in both financial and non-financial ways. It’s perfectly rational to review your situation in light of these changed circumstances.
But there’s no reason to wait for a life event to evaluate whether your financial life is in order.
Choiceology host Katy Milkman and her colleagues documented what they call the fresh-start effect. This is the tendency for people to get motivated to change their life after temporal landmarks (like birthdays, anniversaries, or New Year’s Day).
The key seems to be the recognition, which most of us have, that we can improve ourselves in some way.
To get motivated we create a mental account of sorts where the person we were before an arbitrary date is shut down and a new, better version of ourselves emerges after the date. In other words, we create an “old me” and “new me” where the dividing line is a particular date.
So if you want to get financially fit, any sort of life event is a great triggering mechanism. But you don’t have to wait for a life event to get started. Pick an important date on the calendar and use it as that dividing line between the old you and the new and improved version. People do it all the time for tasks such as physical fitness. Use the same strategy to benefit your financial fitness.
And while starting is tremendously important, the benefits really begin to accrue from finishing. Some people can both start and follow through on their own. But many people need help, and that’s where working with an advisor comes into play.
An advisor can lend their expertise, but also serve as a coach to make sure you follow through on what needs to be done.
After all, half-finished airports, bridges, or metropolitan train systems aren’t terribly useful. The same applies to a financial plan that is all talk and no action.
If you’d like to check out some stories about real people setting goals, there are some great documentary videos and interactive tools at schwab.com/ChartYourFuture.
To learn more about digital advice and working with a CERTIFIED FINANCIAL PLANNER™ professional, check out schwab.com/PortfoliosPremium.
Thanks for listening. If you’re new to the show, you can go back and listen to previous episodes at schwab.com/FinancialDecoder
One episode that’s particularly relevant to our conversation today is entitled “Do You Need an Estate Plan?”
As always, let us know how we’re doing by leaving a review on Apple Podcasts or your favorite listening app.
We’re on Spotify, Overcast, Castbox, and all major podcast apps.
For important disclosures, see the show notes and schwab.com/financialdecoder.