Understanding Behavioral Finance
MARTHA SHEDDEN
Can you explain how scuba diving and bartending at an Italian restaurant led to your career in the financial services industry?
KRIS FLAMMANG
I moved to Florida in the late 1990s. I had no idea what I wanted to do for a living. My background was in psychology. You can't really do much with that unless you're going to go on with your education. I was bartending at night, and during the day I was teaching scuba diving lessons. Florida's a good place to do that. When I was bartending, there was a woman who would come in and sit at the bar and we got to talking. She was a regional manager for a financial services firm, and she thought I would do well in the industry. I interviewed and they hired me. I’m not sure why since I didn’t have anyone I could prospect to or who wanted to work with me. Even if I told my story, they would have thought I was crazy.
Truth be told, growing up, I was terrible with money. As a kid, I spent it as soon as I got it. In college, I lived paycheck to paycheck. I had awful financial habits. I had to learn better tactics over time. I thought, "Well, maybe this would be a good way for me to get my life together." I like helping people. I’d heard in college that this could be a good career, even lucrative if you’re good at helping others get what they want.
Most of my time now is spent talking to people, helping them make decisions, helping them do things in their best interest, and helping them avoid making bad money decisions. That all has to do with psychology or behavioral finance which studies why we make the decisions we do when it comes to our finances.
MARTHA SHEDDEN
I find being a Chartered Retirement Planning Counselor myself, that we must act as a counselor. You are dealing with something that's so emotional and personal. Why did you get the Behavioral Financial Advisor designation?
KRIS FLAMMANG
I had the interest and the background in psychology. People don’t make financial decisions based on fact or rationale, they make them based on their feelings. Why people are motivated to make decisions based on their emotion is what I’m interested in. The accreditation I have gave me a deep dive into the ways behind that. Talking about the different biases we have when it comes to making decisions about finances is interesting. That helped me when I had conversations with people to understand their opinion may be different from mine or what I think it will be.
We tend to think others think the same way we do, but that’s not the case. People might have a different background or different life experiences. For that reason, they may think differently than us. Understanding that helped me not be frustrated by how others think but to help them work through those things and make them aware of why they’re making that decision. Then they can come to a different conclusion.
Some people don't have any financial upbringing or any education growing up on that, from school or their parents. There are certain topics that are taboo, usually politics and religion. In some families talking about money is taboo. Some people may not have any background or upbringing in it at all. That creates a bias or a lens to look through that allows you to avoid making financial decisions.
MARTHA SHEDDEN
I came across your SAM Talk a few years back, where you were talking about work-life balance as a financial advisor. Can you give a synopsis of your speech? Is finding a work life balance specific to financial advisors, or does it apply to everyone?
KRIS FLAMMANG
It's applicable to anyone. In my situation, I was blessed because we were successful in a short period of time as we served niche markets. We had a tremendous amount of growth in a short period of time. When we got on the other side of that, I found that the business owned me. I was spending all my time on it. Monetarily that was great, but the other things were going by the wayside, and I knew they were more important to me in the grand scheme of things. I needed to rework that scenario, so I had more of a work-life balance. That involved hiring people to help with the workload. It involved some soul searching and internal reflection, so I could be more intentional about making time for the things that were important to me, such as being with my family.
The younger generation needs to consider that in pursuit of this goal of balance, they must be especially astute with their money management and financial planning. If you want to have more of a work-life balance, then you must have your finances in order, which allows you more freedom. You must make those things a priority. You can’t be loose with your finances. Otherwise, you won't have the income coming in that allows you to have that work-life balance.
MARTHA SHEDDEN
Talk about your clients.
KRIS FLAMMANG
We serve about 1,200 families now. I would describe our clients as being the mass affluent. If I was going to put a number on it, it might be someone that has a portfolio value of between $250,000 and $2 million. These are people who saved enough money to be able to afford to retire at some point, but they don't have so much money put aside that they aren’t concerned or worried about running out. They are people who want to delegate the responsibility of managing their finances to an expert. They have other things they want to do other than worry about their money. They will clearly admit, "I don't know a lot about this. I need someone who I trust, so they can do this, and I can enjoy my life.”
Those relationships can turn into referrals to individuals or introductions to people who own businesses, people we consider to be higher net worth individuals. Where we live there is a tremendous amount of competition for what you would consider high net worth investors and individuals. When we look at a group of people we want to serve, we want to go with a company where there is less competition but still a need for advisors.
It can be a comprehensive solution. Even those people I described still need what you would call wealth management or planning, which is all the areas of someone's finances, not just investing. They need guidance on that. They need assistance with that. There may be some blind spots they need to take care of they're not aware of. We point those things out and guide them along to get that stuff done. Then they feel like they're in a much better place.
MARTHA SHEDDEN
Do you work mostly with retirement age people or younger people? What is the split in your client base?
KRIS FLAMMANG
Most of our clients are 50 and over. They're in preparation for retirement. They are either close to it or getting ready to do it soon. In part this happens because of the niches we serve and the age of people where we live. In the past five years I started offering a service for younger people. Many times, people think they must have money for an advisor to invest to work with one. It doesn’t have to be that way. I have several relationships with younger people or couples who are doing well and want to make good decisions. They don’t necessarily have money I can manage, and I don’t want to make that a requirement.
We have a consulting arrangement, or as I call it, a project, where we agree on what we’re going to talk about and where I’m going to advise them. Then we work together to get those items accomplished. We charge them a flat fee for that work. That includes the meetings and checking in with us when they need to. I'm compensated for the time I spend and the expertise I provide. I like doing this because it's exciting to say, "Hey, you have all this time in front of you. You're making a great income. If you just do these six or seven things, you're going to rock it. You're going to kill it." For them to say, "Yes, I see what you're saying and I'm going to put that into motion," is exciting for me.
MARTHA SHEDDEN
Compound interest is a huge motivator if you can educate that generation to understand that. The younger generation is missing out by not becoming financially literate at a younger age.
KRIS FLAMMANG
The schools aren't going to teach it. Most parents aren't equipped to teach it, even though they might have good intentions. The government's not going to do it. You either must educate yourself or work with someone who can help you. You only need to do six or seven things and if you do them well, you’ll be in a much better position 10 to 20 to 30 years down the road than if you didn’t. I’m not just talking about compound interest; I’m talking about across-the-board financial planning.
MARTHA SHEDDEN
Tell me about your book Plan of Action: Strategies to Help You Build and Preserve Wealth.
KRIS FLAMMANG
I co-authored that book with 10 other financial advisors. We each contributed a chapter. My chapter was more philosophical. I understand numbers, I know how to use them, and I can talk about them, but that doesn’t really excite me. I wrote my chapter around the financial crisis back in 2007- 2008. I talked about why I thought we ended up with a financial crisis and how we got there. I didn’t focus on high- level macro reasons, but, instead, focused on some of the micro reasons, or attitudes people held across the country about how we got to that point. Then I proposed a change of mindset. People would have to think differently going forward, so another personal financial crisis wouldn’t happen again.
I put forth about 15 ideas in there that would help position people to stay away from their own financial crisis. They could make a tremendous amount of progress towards their financial goals. I called those the 15 for 50, which were 15 ideas for the next 50 years. They should be good for at least 50 years before they become outdated.
MARTHA SHEDDEN
Can you share anything about your new book?
KRIS FLAMMANG
The second book is going to be a summary of several interviews I've done for my podcast. I do a weekly podcast called The Confident Retirement podcast. I'm picking interviews from that and we're writing some summaries from the interviews I feel are appropriate for my audience. It’s about the areas of financial planning most people think of when they think of wealth management. There are several experts in those areas, like Medicare, estate planning, accounting, tax preparation, and insurance protection. These are some of the areas we address when working with someone comprehensively.
MARTHA SHEDDEN
Can you share a story with us about how you helped a soon- to-be retiree with their financial life that changed things for them? How did you help them?
KRIS FLAMMANG
Recently, I consulted with someone who had retired from a large corporation and he and his wife had a lot of decisions to make. He had a pension from that company and had to decide what to do with. They also had a 401(k) retirement plan and they were of Social Security age, so they could make that decision if they wanted to. They were also thinking about selling their house because the real estate market is so hot in Sarasota. They ran into some issues because they decided they were going to take out their Social Security early. They also planned to take a tremendous amount of money out of one of their retirement plans to buy an RV. They assumed taking a pension as a lump sum was the decision they should make because many of their friends were doing that.
I explained to them how those actions interacted from a tax standpoint, and how they weren’t looking at what the long- term impact could be. I went through that with them, so they could make an informed decision. The husband and wife came to different conclusions about how they were going to approach that. I helped them figure out a different way to buy the RV that wasn't so tax disadvantageous. They changed their mind on the pension and how they were going to take it. Then we looked at different claiming strategies with Social Security and how the higher wage earner should defer and wait to do it because their spouse would get a higher survivor benefit.
After we were finished, they admitted they thought they had it all figured out and were coming in to bounce some ideas off me. They told me they appreciated that I had the courage to be honest and encouraged them to think about their retirement in a different way. They admitted their decisions had long-term costly effects they didn’t see originally.
MARTHA SHEDDEN
That is holistic retirement planning. One piece can't be done by itself in a vacuum. There's such an interaction between all that. It's difficult and complicated to get that together, but it pays off with minimizing or managing taxes. It’s important to use those accounts in the right sequence and take the correct amounts out. It's not as simple as deciding you’re going to use 4% of your assets every year.
KRIS FLAMMANG
It's a complex puzzle. Someone could buy the puzzle, dump the box out on the table, sit down, and do it. If you bought the box and then you invited somebody over who had done the puzzle 10 times, then it would go faster, and you would get a better result. We put puzzles together. Many people think they can figure out their own puzzle, but it will take them 10 times longer to do it. If someone else has done it multiple times, however, they’ll have an easier go at it. Just like with the real puzzle, you’ll have an easier and more enjoyable time finding the solution with an expert’s input.
I think about how most people will change doctors if they don’t trust them. A good doctor must talk to them about their symptoms and health to come up with a good solution on what they should prescribe. When someone's willing to open themselves up and talk about all those things in their life, it results in a better outcome for them.
MARTHA SHEDDEN
What are the three most important takeaways for financial professionals who help their clients with Social Security and retirement planning?
KRIS FLAMMANG
First, you must start the conversation early. People in their 50s call me and ask if they should come in even though they aren’t planning to retire until 62 or 65. I always tell them to come in because if something is broken or behind, or you need to catch up to get where you want to go, then we want to have time on our side to fix it. We want to start those conversations early.
We want to know in advance. Then if we must change course or course correct, we have time to do that.
Second, you must be aware of bias. I'm talking about the biases we all have when it comes to making decisions about our finances. Some people only think about current events in their life. Then those things have more of an impact on their decision-making because the event is fresher in their mind. All people seek out information that supports the decision they want to come to on their own. You might do a Google search for, "Reasons to take Social Security at 62," and then all the articles support taking your Social Security at 62. The information you found supports what you already wanted to do. My job is to help people be aware of those biases and talk through them. I talk about how their personal current events could impact their decision making.
Third, in our industry we must have the courage to lead people. Everyone is scared. Some people are lonely. They don’t want to make bad decisions or they’re afraid to make a choice. As advisors, we must have the courage to lead people in the direction that will help them live a better life. Even if they disagree with something we talk about or suggest, if we believe it is in their best interest for them to consider it or to do it, we must have the courage to lead them in that direction. Even if they say, "No.” Many clients thank me for the advice I give that isn’t convenient or easy.
MARTHA SHEDDEN
Do you find a big part of success in the financial world comes from having the trust of your clients?
KRIS FLAMMANG
It goes beyond trust. If someone were to ask me if trust is the highest level of connection two people can have, my answer would be no. Trust is just a baseline. It’s expected. When a client comes in here for the first time and talks to me, trust is an expectation they have. Having a relationship where the person knows I have their best interest in mind goes above and beyond having trust. They trust me as a baseline, but then, they get to a point where they know if I make a recommendation, they are confident I’m doing that with their best interest in mind.
The level of detail they might need to decide, or the level of analysis they might need to say, "I’ll go along with that," often reduces. It's not that I don't do disclosures. It's not that I don't give them all the information they need to make the choice, but we've transcended trust and have entered a deep friendship. For example, if you're out with a friend and you tell your friend to order you something while you’re in the bathroom, and then come you back and there’s your favorite beverage, you think they know you well enough to know what you like. You trusted your friend enough that you didn’t care what they ordered. I’m interested in having close relationships. Instead of having clients as accounts or numbers, I want to enjoy the company of the people I meet with. I want to like and enjoy the people I meet with. I want there to be mutual respect. I want them to feel they’re getting good advice, and I want to feel the advice is appreciated.
MARTHA SHEDDEN
What are the most common questions regarding retirement and Social Security people should be asking but aren’t?
KRIS FLAMMANG
They don't ask about the impact on the spouse if they wait to take out their Social Security. They don’t ask what the benefit is going to look like if they wait even six months or a year before taking it. They need to think about how that impacts them over their lifetime if they live to their life expectancy or beyond.
MARTHA SHEDDEN
You shared a lot of valuable information. Thank you!