Risk Management Tools and the Future of Behavioral Finance with Daniel Crosby

Jack Sharry: Welcome to WealthTech on Deck. I’m so glad you could join us for this conversation. Our podcasts take place each week with industry leaders sharing their point of view on a variety of topics around the confluence of human and digital advice today, and where it’s headed in the future. We cover three areas, a little bit about our guests background and how they found their way to be on the show. We then talk about what they’re working on now, especially around human and digital advice. And we close with what we see coming in the future. So today we’re talking with Dr. Daniel Crosby. Dr. Crosby is the chief behavioral officer at Orion Advisor Solutions. Daniel, thanks for joining us today.

Daniel Crosby: Yeah, so again, great to be here. So my journey is, I think probably a typical of most journeys within the financial services space. I actually am a clinician by training, I got a PhD in Clinical Psychology, with an eye toward helping folks with eating disorders. So it’s sort of an atypical, ask to be where I am today. But I discovered about three years into my doctoral program, that while I really, really enjoyed thinking deeply about why people do the things that they do, I didn’t necessarily enjoy doing that in a medical context. And so about year, three of a five year program, I went to my dad, who was and is a financial advisor, and I said, Dad, you know, I’m having some misgivings about, you know, my chosen path. I love psychology, but I’m looking for a non-medical, non-clinical application of it. And he said, Well, you know, there’s, there’s tons of psychology and I work. And I said, you know, what are you? What are you talking about? Like, you’re, you know, you’re a numbers guy, you know, think I’m whatever at the time 26. So I’m like, No, you’re a numbers guy, you’re an analytical guy, you’re a money guy, there’s no psychology there. And he said, you know, whoa, not so fast. So he points me to a number of great books and number of classics. And I begin this journey of understanding the psychology of wealth, the psychology of enough, the psychology of financial markets, absolutely fell in love with it. And so, you know, long story short, started with a firm, a consulting firm here in Atlanta, working inside of banks, but quickly spun out and started my own consulting firm, at the ripe old age of 29, in the middle of the Great Recession, and said, I want to help people like my dad, you know, people like dad, who are financial advisors, my dad lives in North Alabama. So you know, people who are doing great work helping everyday clients in achieve great investment outcomes. But doing so without access to the ivory tower of academia, they needed sort of an in between a translator between the ivory tower and the boots on the ground. And so I’ve spent my career trying to be that translator, correct.

Jack Sharry: That’s fascinating. I did not know that. So how did you go from at the ripe age of 29? How did you go from your own consulting practice? I know you start did a lot of work with Brinker, maybe there’s something before that, of course, now breaker is part of the larger Orion organization. So talk a little bit about that transition. And, and then also, if you talk a little bit about what a chief behavioral officer does.

Daniel Crosby: Yeah, so the transition was very organic. And I mean, it really all traces back to one single engagement. You know, money’s tight in the Great Recession, people aren’t spending a ton on value, add programs. I’m young, I’m on proven and I was hassling various people to try and get a chance to try and get a foot in the door. And so finally, someone said yes, to me, basically, I said, Look, I can do a great job for you. Give me a chance. I know you, uh, you know, kind of like, I know, you’re blowing me off. But, you know, please give me a chance. I’ll fly up there on my own dime. I’ll speak to your folks and that’s what I did. They said, Okay, so they said, Okay, fly up to Boston, you’re gonna present to a couple 100 advisors. If we like it, we’ll you know, bring you in to do some work with us if we don’t stop bugging me, kid. And so, you know, I flew up to Boston. Quite serendipitously I met Ali McCarthy who quickly then became the Chief Marketing Officer at Brinker and brought me over to Brinker. Based on the strength that we had done at her previous organization. Ali brought me to Brinker, where Chuck Widger, Brinkers founder was actually as luck would have it in the very early stages of writing a book on how to use mental accounting and other psychological frameworks to structure Asset Management in a way that kept investors in their seat. So I got to meet Chuck early on co-authored a book with him. And then was a part of the Brinker team, when we got acquired by Orion, and that’s just been an absolute dream. Eric Clarke and I share a vision for how behavioral finance can be infused into technology. And it’s been it’s been a wonderful partnership.

Jack Sharry: So just for our audience in terms of timeline what’s, when did you first meet up with that fateful date in Boston when you started talking about this stuff, and then we’ll get into what you’re doing today. But talk a little bit about just the timeline. Just so there’s a point of reference as to how this evolved.

Daniel Crosby: Yeah, so that would have been about early 2010 I think so like early 2010. I worked with Brinker externally, for like, seven years. I mean, I was just sort of a regular contributor, regular consultant, but had a you know, two handfuls of other clients. Brinker being you know, one of the bigger clients so, worked with Brinker closely for seven years, came inside at Brinker, you know, I guess about three years ago when they were looking to do some more dedicated behavioral finance work. And then we were of course, acquired by Orion about a year ago.

Jack Sharry: So I had the good fortune of knowing Chuck Widger, for at least, I don’t know, 25-30 years long time. And, Eric, we’ve gotten to know over the past few years, to have the real stalwarts in our industry to really fine human beings and clear vision and understanding of what’s important to talk a little bit about that dynamic. The work you did with Chuck and writing the book, the work you’re now doing with Eric, and I know it’s part of the large organization that always starts from the top. And clearly they got it early on and brought you in, and then now you’re playing a central role. And then we’ll get into a little bit about what you do day to day, currently. But a little bit about that transition of to, to the people I admire most in our industry.

Daniel Crosby: Yeah, well, I’ll begin with the chuck partnership. You know, Chuck, by the time that I had met chuck, chuck had been in the industry for about 30 years. And Chuck’s a very intelligent guy. He’s a lawyer by education. And he had just learned a ton through the process of just being in the trenches for three decades. He didn’t always know what to call it, though, right? Like he had observed various psychological phenomena. And he had noticed tendencies in investors and had noticed how the way that they structured their product brought about different outcomes in clients, but didn’t always have sort of the research backing to know what the formal technical term for it was, or what the research said about it. So my partnership with Chuck was sort of a beautiful marriage of theory and practice I being the theory and he being the grizzled veteran, as it were, in terms of Eric, you know, Eric has this vision to think that we can understand clients better than they understand themselves. There’s actually cool research that shows that your co-workers are a better predictor of your behavior than you are, right. So we really interesting, we see each of you know, we examine our own behavior, sort of through a glass darkly, we sort of strain all of our perceptions about who we are and what we’re likely to do through a self-serving lens. Whereas our co-workers and our loved ones don’t have any need to see us through sort of rose-colored glasses. And so there’s reason to believe in the evidence suggests that other people can know you better than you know yourself. And we believe that it’s possible for advisors to to know their client’s financial behaviors, better than the clients themselves can know and anticipate those things. So that’s the that we’re on at Orion, to try and understand our clients better than anyone in the business and help them achieve great things.

Jack Sharry: Well, I would argue you guys are well ahead of the rest of behavioral finance is playing an increasingly prominent role. And we’re going to shift our discussion now to the technology after all, this is well tech on deck. So some of our listeners might be wondering, why are we talking about the psychology and I know you have an answer for that. And now you’ve done some interesting work. Recently, we released a capability I’m not sure how to characterize it with doing some work with had levers a recent acquisition with Orion around risk management. So talk a little bit about what a CBO a chief behavioral officer does in terms of translating theory into practice as in technology and in terms of in levers, it may go beyond that. I’m imagining it too.

Daniel Crosby: I have yeah, because it does. So really, I’m tasked with three things. They call it the three T’s. We’ve got training tools and technology. So we have an advisor education arm called the Center for Outcomes, where we educate advisors on everything from how to have a conversation with your clients that sticks and leads them to implement your best advice to How To Hire great people, to how to profile a client, you know, and everything in between. So I am one of the key parts of that educational outreach program, the Center for Outcomes. But we also want to develop new tools. You know, you talked about our new risk tolerance questionnaire called the 3d risk tolerance questionnaire, it measures the dimension of risk that’s not commonly measured in the industry, and that’s risk composure. So without going off on too hard of a tangent, risk tolerance is sort of your long term willingness to make risk reward trade-offs. Everybody measures that risk capacity is your ability to take risk based on the level of your goals, your accumulated wealth, your timeline, these sorts of things. And then risk composure is the likelihood of emotion entering the equation, it’s effectively how likely is emotion to skew your long-term attitudes toward risk reward trade-offs? There’s not a lot of folks measuring this risk composure. We’re measuring it and it gives us insights from everything into, you know, do I want to work with this client in the first place? You know, I think that advisors, one of the things that they can do is be thoughtful and selective about who they choose to partner with. So we give them some insights there. And we let them know, you know, how difficult is it going to be for this person to stay the course, if things do get choppy, who among your clientele is likely to need a helping hand or an outreach? So all of that stuff factors in Oh, finally, of course, what sort of allocation is going to be optimal for this client? Because we think in terms of anxiety, adjusted returns, and not just simple risk adjusted returns, a lot of times I think, as an industry, we go for sort of this spreadsheet optimal like in a vacuum, what’s the optimal allocation for this client? Well, we know that people don’t live on spreadsheets, they live in the real world, and it’s messy and emotional. So we want to make allocations on behalf of our clients that are real world optimal and not spreadsheet optimal. So I think you see how just introducing this one element of measuring human behavior and human psychology into an industry standard, which is the risk tolerance questionnaire, can give a person a great deal of insight into who they are sitting across the table from.

Daniel Crosby: So let me see if I can translate and correct me if I’m wrong, what I’m hearing is, you’re looking at risk from a variety of different angles, risk composure, being distinctive, at least at this point, to others, trying to copy you. But the idea is to look at risk from a variety of angles. And then using unassuming use hidden levers to then implement that or address those concerns. So that the portfolio the asset allocation, the holdings are consistent with what you’ve determined from a risk standpoint. Am I getting that right? You got it? You nailed it? That’s great. And is anyone else doing anything? Like I’ve not heard anything close to this? So tell me, so there are some in Europe. So there are folks in Europe that are doing this? Well, I’ll say as a general nod to Western Europe, they’re ahead of the game. With respect to behavioral finance, they’ve been more receptive to it, their educational institutions have opened up and created sort of dedicated behavioral finance programs before we in the US have. So we’re not the only ones doing it in the world. But no one with more than 1% market share is measuring risk composure as a standalone. And so we think we have an opportunity to, you know, just add a new dimension to the conversation and have it reach a lot of lives and impact a lot of souls and a short amount of time.

Jack Sharry: This is really fascinating. I would love to hear something new, different and as important as this sounds, because at the end of the day, investing assets is an emotional proposition. It is not a logical theoretically, it’s logical, but it’s in my over 30 years, almost 40 years. I haven’t seen that yet, where people are logical when it comes to investing, they buy high sell low is ramping to this day. So how does that manifest? So I’ve gone through the process of this tool, how does it advisor applies, it’s something that is used to keep them on track to talk a little bit about what that how that plays out in reality between advisor and client.

Daniel Crosby: Well, there’s a couple of ways right so one of the things that we can do is make the client aware of this tendency from the outset. You know, I think a lot of people Morningstar has done great research. They talked about, you know, all the different things that an advisor does. And then they asked the client to sort of rank them in terms of their relative importance. Well, we know from the research that without a doubt, it’s not close, the biggest value that an advisor adds is keeping her clients in their seat, like the biggest value that an advisor adds is behavioral coaching, emotional management, decisional coaching, there’s a very robust body of literature on that. Well, so that’s point A. But point B is from the Morningstar research, we know that that is the thing that clients think that they need least trusting, they’re really looking for eye popping returns, right, they think they’ve hired, you know, the Warren Buffett of wherever they’re from, right, so they think they’re getting an investment manager, what they’ve really gotten as a behavioral manager. So one of the things that the composure element allows us to do is to have that conversation early on, and make them aware of the centrality of managing emotions to achieving their goals. Now, the other thing we can do is known in the psych literature is pre commitment. Right? So pre commitment committing in advance in that cold emotional state. Okay, Daniel, you know, you’re prone to freak out a little bit when things get choppy, you know that about yourself. Now, there’s going to come a time, when you’re going to come to me Jack, your advisor, and you’re gonna say, Jack, sell everything, you know, I want you to commit now that when that time comes, you won’t do that. Now, it sounds like a simple thing, like, crazy simple, it is simple. And yet it’s powerful. The impact it has on behavior is powerful. Because what you can do is say, you know, and on that day, when I come to you say, Hey, Daniel, like we knew that there would be days like this, right? We knew that there would be days like this. And when you were in your right mind, effectively, when you were in a cooler, calmer place, you knew that there would be days like this. And we promised that we wouldn’t do this, right? So it allows you to educate them, it allows you to pre commit them. And then the next thing I would say is that it allows you to know who needs a helping hand. Do you know who needs to be reached out to? So Betterment the robo advisor did some fascinating research a few years ago, they were sending blanket messages on tough days in the market, we’re here we are on July 8, the markets down about a percent and a half today. So I’m sure there are people who are panicked. So what Betterment would do on days like this is they would send out an email blast to all of their customers and say, Hey, don’t panic stay the course we knew there would be days like this. And what they found is that it was actually negative, because the preponderance of clients weren’t worried, right? Like many, many of their clients weren’t worried. And so when they got this email that said, Hey, there, there’s nothing to worry about. They’re like, Oh, God, like what? You know, what should I be worrying about. So this allows us to segment and serve different parts of the client population. You know, on days like today, when the markets are a little choppy, you can reach out to just your most easily spooked clientele. You don’t have to reach out to every single person and say, Hey, there’s nothing to worry about. Because what you’re really doing is planting seeds of doubt in the minds of people who weren’t worried in the first place. So this really does allow for some customization and some catering of financial planning and advice, which we also think is powerful.

Jack Sharry: Yeah, I’m sure you’ve seen the dowel bar studies over the years of that investors underperform the markets consistently and by a lot, because they’re freaking out or what have you. This really sounds I read about it not too long ago, and you all announced it, but it’s even cooler than I thought congratulations. It’s really, I think, an important step. So let’s talk a little bit about given this. And I’ve always been thinking that at some point, behavioral finance and actual finance would find their way together. And clearly that’s on its way. And I know of a number of others, others we’ve had as guests. I know, I think you may know, Dr. Michael Liersch, who is at Wells Fargo, he’s done a lot of work in terms of building a platform. We’ve had some others on the show that have talked about behavioral finance and how important that is. So where does it all go? Where are we headed, at least you can’t predict for the industry, but you can for your organization. So where do you see this leading?

Daniel Crosby: I think there’s really three places that that it leads, right. And each one of them is more powerful than the next. So I talked about my three T’s earlier, I’ll talk about three E’s now. So there’s sort of three E’s that are necessary to change behavior. And the first is education. So this is kind of where we are today. We as an industry are broadly interested in behavioral finance. People are reading books like mine, and they’re listening to folks like myself and Michael Liersch who you talk About, they’re learning about bias. They’re learning about decision making. This is good, right? Education is the first step, knowing that these things exist, being able to educate our clients about them and educate ourselves about them. But here’s where it gets a little unpopular. Most people think that that is sufficient, right? Like, if we know about these things, then the world we’re all set. Daniel Kahneman, who won a Nobel Prize for his pioneering research into behavioral finance, has said, he’s no better than the next person at avoiding bias. And I mean, he’s the guy who discovered them. All. Right. I mean, this is a Nobel Prize winning psychologist saying, my awareness of my proneness to bias does little to nothing to insulate me from actually falling prey to bias. And he’s right. You know, we actually see this in the literature, like you see it all over the place, doctors and nurses smoke at a much higher rate than the average population. These folks spend their whole lives telling people not to smoke, and then they go home and.

Jack Sharry: I was not aware of that.

Daniel Crosby: The general population 13% smokers, nurses 24% smokers, doctors 17% smokers. And but we see this all over the place, we see that advisors help their clients to make financial great financial decisions. The average person who has a long-term relationships with an advisor has nearly three times the wealth of their peers who get no advice, even when you hold things constant, like education level, income, socio economic status, and things like this. But then when advisors come to make decisions for their own money, they’re just as flawed and irrational as the next person. So education is a foundational layer, it’s necessary but not sufficient. The next layer we need to work to is environment, right, like putting our clients like I talked about earlier, in that anxiety adjusted optimal portfolio, we need them to have, we need them to live in a world that is reflective of their psychology. And there’s not a lot of that going on, I think right now. So we have work to do as an industry to make sure that the environment in which investors move will move around in is more conducive to their success than it is today. And then the last one is encouragement, which I’ll call talking someone off the ledge or sort of that, what the research calls just in time advice. So there’s a lot of people clamoring for financial education in like in high schools, for instance, that’s okay. And it’s like, this is the most unpopular thing in the world to say. But when we look at the at the forgetting curve, most people forget things that they learn in a classroom within three days. And so you can teach, you know, 16 year olds, all about interest rates and the Federal Reserve and, and the power of compounding and things like that. And by the weekend, it’ll be out the other ear. And that’s no knock on young people. That’s just how you know our minds work in time, advice or encouragement, this is where we can bake it into the technology. So when I’m in my Orion portal, and I want to make a sell decision, a little pop up comes up and says, Hey there, Daniel, here’s the tax consequences of what you’re about to do. Right? Boom, right in that moment, right? Or, Hey, I’m about to sell. Daniel, are you sure you want to sell? Because, you know, we know behaviorally that the more people make adjustments to their portfolio, the worse they tend to do across 19 different countries? Hmm. Right. That’s more powerful when it’s baked into technology. And it’s real time than me learning a lesson from you know, someone droning on someone like me with a PhD droning on and in a high school or college course, when you’re thinking about what party you’re going to that weekend, or the cute person in front of you. So these three things that we need, we need all three legs, we need to educate clients and advisors about the realities of behavioral finance. We need the right environment, the right portfolio mix for them. But we also need that encouragement that’s happening just in time to educate people when they’re on the precipice of making a decision.

Jack Sharry: Well, this is fascinating. And I will invite you back as sooner than later because I’d love to hear more. And I’m sure you’re gonna learn a lot as you go because this is relatively new. And I would imagine just based on what I know about your data, you’ll be learning as you go and adjusting and refining and making it better. So thanks for sharing that and let’s do This again sooner than later to see how it goes. So in an effort to stay within our proposed timeframe, why don’t you share three things that you think our audience would benefit from as takeaways you’ve shared a lot. But if you could pick three things that would be useful for our listeners, please do.

Daniel Crosby: Yeah. So I think the first thing to know is that behavioral finance is a mirror and not a window. Right? So behavioral finance, a lot of folks look at it as a mirror onto other people’s behavior. Like, why does Jack do these silly things? Or, you know, yes, my wife or my clients totally do these things. I think real practitioners of behavioral finance, read books like mine, and go, this is about me, right? This is about me, what can I learn? The second thing is, is like the first, right, the second thing is a little bit like the first is knowing that you are not special. All of the things that you learn about, these aren’t for other people, they pertain to you, too. So learn about human psychology in a way that says, you know, this, this pertains to me too. And then the last thing I would say perhaps the contrarian in me says, None of this matters very much. None of this money stuff that we spend all our time wringing our hands and talking about is very important in the grand scheme of life. So get enough money and get enough comfort to do what you need to do to cover your basics. And then go focus on bigger, better things that are that are more enriching, and more lasting. I’ve been trying to stack gold coins. So I love to talk about money. But ultimately, it’s a vehicle to doing things that matter more than making lots of money.

Jack Sharry: I could not agree more. And, again, I look forward to our next conversation. This has been fascinating. So as we close this session in as we do each week with our guests, when we shifted a bit talking about what’s important in life, so what’s important in your life outside of work, what are you particularly passionate about? Or do that people might find interesting or surprising?

Daniel Crosby: Well, I’ve got two guitars behind me here that I’m not as good at playing as I wish I work. But the biggest rocks in my life are my family, I have three young children, I have a wonderful wife and trying to be a good husband and father is number one for me. I’ve spent the pandemic practicing guitar in a way that I haven’t since I was 16. And so that’s been another area of growth and engagement for me. And then last thing is my ultimate goal in life is to write a book on helping people find meaning. I think that my meaning in life is to help other people find their meaning. And so people kind of laugh when I say I want to write a book on the meaning of life. But I’m not joking. And that’s, that’s really kind of what That’s my ultimate push in my ultimate goal.

Jack Sharry: Great. I would like to learn more about that as well. But thanks for sharing that and really love wonderful content here. So thanks so much for this this conversation and like to turn to our listening audience. And as you know, our focus is wealthtech industry execs This is a slight departure in that we are trying to figure out how to help us as industry execs, help advisors and investors do better. So as part of this effort to have this ongoing conversation, we now have over 1100 subscribers pretty narrow, niche audience that we are trying to appeal to. Turns out it was much larger than expected. So thank you all for listening in. And as you’re going about your day to day if you find the podcast to be enjoyable and useful, please rate review and subscribe and or share what we’re doing here at wealth tech on deck, or we’re available wherever you get your podcasts and Daniel thanks again.

Daniel Crosby: Until then, Jack.