Episode #481: Sarah Stanley Fallaw – The Psychology of the Millionaire Next Door

Episode #481: Sarah Stanley Fallaw – The Psychology of the Millionaire Next Door

 

Guest: Sarah Stanley Fallaw, Ph.D., is the author of The Next Millionaire Next Door and the founder and President of DataPoints LLC, a company that provides technologically-enabled financial psychology tools to enhance wealth-building.  In her role at DataPoints and her research, Dr. Fallaw continues the study on self-made wealth begun by her late father, Dr. Thomas J. Stanley, who was America’s foremost expert on the affluent.

Date Recorded: 4/12/2023     |     Run-Time: 53:05

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Summary: In today’s episode, we look back at some of the key takeaways from her Dad’s book, The Millionaire Next Door, one of the most important personal finance books ever written. Sarah shares what’s changed and what’s stayed the same since the book was published in 1996, and how you can try to instill these traits in your kids.  Then we talk about her company, DataPoints.  Sarah explains how she’s able to help advisors learn their clients’ individual personality towards financial decisions and coach them to make better financial decisions. She shares some best practices from working with advisors, how much of this is nature versus nurture, and some of the main differences between genders.

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Sponsor: Farmland LP is one of the largest investment funds in the US focused on converting chemical-based conventional farmland to organic, sustainably-managed farmland using a value-add commercial real estate strategy in the agriculture sector. Since 2009, they have built a 15,000-acre portfolio representing over $200M in AUM. Learn more by emailing them at ir@farmlandlp.com.

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Comments or suggestions? Interested in sponsoring an episode? Email us Feedback@TheMebFaberShow.com

Links from the Episode:

• 0:39 – Sponsor: Farmland LP; ir@farmlandlp.com
• 1:47 – Intro
• 2:44 – Welcome to our guest, Sarah Stanley Fallaw
• 3:20 – The legacy of her and her father’s books – The Millionaire Next Door and The Next Millionaire Next Door
• 4:20 – The common traits of millionaires
• 8:05 – The main drivers for building wealth
• 10:12 – The aspects of the data that surprised her most
• 11:46 – Balancing sharing wealth with family and instilling good money values in children
• 14:34 – An overview of DataPoints
• 17:27 – How much one’s childhood can influence how you spend and save
• 18:53 – Categories and characteristics they analyze
• 21:21 – Typical use cases for DataPoints clients
• 29:48 – How advisors and seasoned investors utilize DataPoints
• 35:41 – Generalizing gender differences in investment personalities
• 38:02 – The process of changing one’s investment personality
• 40:11 – The real-world importance of measuring the types of traits they focus on
• 42:57 – Quit by Annie Duke
• 43:41 – Should you avoid divulging your wealth to your kids?
• 45:35 – The state of personal finance literacy in 2023
• 47:26 – Sarah’s most memorable moments from her career and her dad’s legacy
• 50:01 – Find out more and try their self-tests at datapoints.com/go; Twitter: @sarahfallaw; @datapts

 

Transcript:

Welcome Message:

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Disclaimer:

Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Data industry regulations. He will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Sponsor Message:

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Meb:

Welcome, my friends. We get a really fun episode today. Our guest is Dr. Sarah Stanley Fallaw, the author of The Next Millionaire Next Door and the founder of DataPoints, which provides technology enabled financial psychology tools to enhance wealth building. In today’s show, we look back at some of the key takeaways from her father’s book, The Next Millionaire Next Door, one of the most impactful personal finance books ever written. Sarah shares what’s changed, what’s stayed the same since the book was published back in 1996, and how you can try to install these traits in your kids today.

Then we move on to her company, DataPoints. Sarah explains how she’s able to help advisors learn their clients’ individual financial personalities and how to coach them to make better financial decisions. She shares some of the best practices from working with advisors, how much of this is nature versus nurture, and some of the main differences between the genders. Please enjoy this episode with DataPoints’ Dr. Sarah Stanley Fallaw. Sarah, welcome the show.

Sarah:

Thanks for having me.

Meb:

We did a poll as I love to do on Twitter, but we did one a few years ago and I said there’s no one investing book that traditionally I hand to people. A high school, college-aged kid says, “I want to get interested in investing. What do I do?” Usually it’s a smattering of recommendations, but I asked the audience, I said, okay, we’re going to do five categories. The show note links listeners. The post was called Learn to Invest, your series that your father originally did back in the ’90s and then the most recent was right at the top of the list.

Sarah:

That’s awesome.

Meb:

Do you remember this book being written when you were a kid, because you’re pretty young like me?

Sarah:

Well, I’ll take that. Yes, absolutely. My father started that research back in the ’80s, ’90s, began looking at how people built wealth over time. At some point, he left his career at a university and went out and started consulting. He had already been writing books, but really took a leap of faith with this one and put together, again, this profile of people that… Before that, people thought millionaires and those that are wealthy just had some magic formula that no one could find, but he really dispelled those myths.

Meb:

This book series, The Millionaire Next Door, your recent update, The Next Millionaire Next Door, really chronicled some surprising takeaways, part of which I think we’d like to hear too how it’s changed over the years. But maybe just give us a broad overview of the thesis and findings of the book both in the ’90s and the more recent version. When did the next one come out?

Sarah:

Right, 2018. The original that came out in 1996, I was in college at the time, so I wasn’t paying a whole lot of attention to what my dad was doing. But again, the original thesis was that those that are wealthy often are building that wealth on their own, and you more than likely don’t recognize them. They’re not showy. They’re not showing off their wealth. They tend to be those that are frugal. They’re building wealth over time. Again, that book really captured seven different traits of the wealthy. And then throughout the years after that, my father wrote several other books looking at, again, millionaire populations, stack of millionaires as well, looking at characteristics.

And then this last book we began before he passed away, so the research and the background on it to look at what had changed and what had stayed the same, and that was really the focus of The Next Millionaire Next Door. And not surprisingly, a lot of those characteristics like being conscientious and being frugal and all those things tended to still be important in building wealth. Some of the numbers obviously have changed. It was published in 2018, the original was 1996, so some of the things had changed in terms of home ownership and so forth, but really those characteristics are timeless.

Again, you see that in academic research as well. We know that people, again, that are able to create plans, follow through on them, that save a significant portion of their income, all those kinds of things lead to building wealth over time.

Meb:

How much input was there or none at all of the romping stomping ’90s investment arena that came out not at the peak, but on the up ramp versus the 2000s, really from 2000 to 2000 through the GFC was rough sledding. Did that have a huge impact on the composition or style of how people got to this millionaire status level, or was it more of an aside?

Sarah:

I think it was more of an aside. I mean, at least again, from not having done the original research, if you look back and you see the profile of those that built wealth on their own, it was a combination, again, of this frugal business owner in some nondescript industry combined with some level of investing and often with a financial advisor. They’re not necessarily doing that on their own. They do tend to pay for and find professionals that they trust. Yes, it had something to do with it certainly. They were able to grow that wealth over time as well, what they were saving. But again, I think it all starts with it transforming income into savings and then that into wealth.

Meb:

I mean, that point you make right there, the concept of income and the concept of wealth, particularly the young cohort, I don’t think they appreciate as much. How much was the impact of being their own business owner versus just real estate? What were the main drivers for these group that you guys researched? Did you look at a totally new data set for the second one, and then how many people were you guys looking into?

Sarah:

Each of the books, again, including The Millionaire Mind and the others, they always included a new set of data. New survey was conducted for each of those years, which is interesting, because then you can, again, look at those trends over time too. I’d have to remember exactly, but in the latest sample there were somewhere near 700 millionaires total. And in the original, I think it was somewhere around 1,300. I may be wrong about that, but somewhere in that neighborhood.

Meb:

Is it a of majority business owners, or is it people doing it through their house? The house has always been a big one [inaudible 00:08:55]

Sarah:

I think that generally what we see is there’s a pretty even distribution, if you will, of business owners, as well as C level executives and then professionals as well. That tends to be what is seen in the data. In the original, there were a couple of different samples that he included, particularly business owners. That was actually one of the sub samples, if you will, that was brought into the book. But again, it just depends on the path. For me, again, not having done the original research, that was one of the more interesting things that I found was that, again, there are all of these unique paths.

While there’s some tried and true ways of building wealth, it doesn’t mean that you have to do it exactly the way someone’s prescribing, whether it’s I’ve decided to be a teacher, but that means that my lifestyle is going to have to be a little bit different in order to build wealth, or I want to start my own business, that kind of thing. I think for me, again, being a psychologist, that was one of the more interesting trends that I saw from the research.

Meb:

Any main surprises? It could have been in either book or just the latter one. As you guys sift through the data or look at it, anything stands out for you personally? It may not be industry-wide surprise, but something for you where you’re just like, huh, that’s a head scratcher to me? Because the first book, to me at least, it felt like the world of the millionaire is more accessible than most people think. It’s not this golden pedestal that either you’re gifted all this money or it magically you have to hit the lottery. It’s very attainable. That was more of a revelation, but I feel like that’s becoming more well known. But what surprised you?

Sarah:

I think what surprised me is that many millionaires will say that their parents are frugal. But at the same time, if you’re first generation wealthy, you often have a hard time not letting your kids see that or you’re wanting them to maybe not have to suffer through the things that you had to do in order to build wealth. Again, now that we have children and we’re seeing that same challenge for those that are able to build wealth.

If I spent my entire lifetime trying to accumulate wealth and then I have children, how do I make sure that they have those same experiences in a way that’s maybe positive that allows them to also have the same characteristics and experience that allowed them to build wealth too.

Meb:

How do we do that? I need the answer, Sarah.

Sarah:

I need the answer to that.

Meb:

I got a five-year-old. We spend actually a lot of time on the show talking about that concept of people spend so much time optimizing on how to make money. They get it, but also their children may have an entirely different upbringing than you did. In many cases, many of the millionaires you talk about were frugal. They came from nothing. How do you think about that?

Sarah:

A couple of things. Number one, definitely saying no is something that has to be in your vocabulary when you have children and you want them to be able to build wealth on their own. I struggle with that. Thankfully, my husband is a little more better. He’s better at saying no than I am. I think that that’s one thing that we see consistently. And then also having them learn about money early. I know that that’s something that you talk about, but certainly helping them understand how to save for something, that they don’t are just automatically receive whatever it might be.

In our household, right now we have teenagers and pre-teens, so the Stanley cups, not the Stanley Cup from hockey, but Stanley cups, the $40 water bottles are the hot topic. You might have to save for that. That’s not something that we’re just going to go out. We have 100 water bottles in our house. Simple things like that. Again, allow them to see what it takes in order to actually acquire the things that they have. Again, I think that most of us succumb to what everybody else is doing, the FOMO mentality from time to time, but it’s even harder for those that are adolescents or teenagers.

Just recognizing that and helping them understand that you felt that too. I get it. Everybody around me has a brand new car. Maybe I want one too, but I’ve got to be patient, or we should be happy with what we have. Whatever works for your family has to be discussed and talked about with children as well.

Meb:

Trying to figure out tying together scarcity, as well as putting them through some struggle as long as they’re safe, I think, is a thoughtful approach. I was going to say with the Stanley cups, you just need to drag them to a few financial conferences and go pick up some swag. They have the YETI tumblers at every booth. Just bring them along. I was just thinking in my head as you’re talking about expensive things unbeknownst to me. It’s been a long time since I did some Legos, and we’re knee-deep in them now. But talk about any private business I would rather invest in than Lego Company and maybe Chick-fil-A.

Those are my two private ones I’d love some shares in. All right, so listeners, there’s a lot to dig in. You guys know I’m a quant stats guy. Pick up the book. There’s a lot of topics that you can flip through that I think are interesting and thoughtful. I want to talk a little bit about DataPoints. Your background and what you studied and the letters after your namely a slightly different take on the financial world. Tell us a little bit about what your focus has been and a little bit about DataPoints.

Sarah:

Again, coming from really the research that started with my father’s work, we created, again a lot of different surveys, and he certainly created them as well. DataPoints has taken a lot of those items, questions from the surveys and created behavioral assessments to understand, again, our mindset when it comes to things like spending and saving and investing. That’s what we’ve created. We have a lot of different tests.

You can take them on our website and all that good stuff, but our platform and our business model is one where we help financial planners, financial advisors really understand their clients, understand their attitudes and personality when it comes to making financial decisions. That’s what we’ve built today and that’s what we continue to study. We constantly have this data coming in looking at, again, things like what does it take to build wealth, and we do that from a personality perspective.

Meb:

You guys have a slightly different take on this, so I’d love to dig deep here for a little while. The traditional financial advisor I think really leads with a risk questionnaire. They say, “Here’s your asset allocation. Here’s your tolerance. Here’s how much money you’re going to lose in these Monte Carlo simulation,” whatever it may be. You have a slightly different way to think about this. Can you talk a little bit about y’all’s framework and we’ll hop all over the place?

Sarah:

Yeah, that’s great. We view all of us as having a job that’s managing our financial lives and then a specific job that we have as investor. We’re all let’s say investors to some extent. There are certain characteristics that allow us to be really good at the long-term investing strategy. That’s how we’ve created a risk tolerance assessment is really looking at a client’s life experiences, their patterns of behaviors, and how they react emotionally, how much confidence they have in their decision-making.

That’s how we help advisors and their clients understand their overall what we call psychological risk tolerance. That’s again a little bit different than some models. We follow after Grable and Litton. Dr. John Grable is on our advisory board. It’s again a psychometric approach to understanding how we invest and how we might be investing in the future. We try to predict what clients will do based on all of those things.

Meb:

How much of this is preordained, meaning come out of the womb? Ignore the genetics like behavioral side, but just like you get two parents, if you’re lucky, but your upbringing and your formative first 15 years, 16 years. How much of that defines us? I mean, is it all? Is it half? How does it, I mean, it has to for everyone, but impact how we think about the world?

Sarah:

The way that we describe this is, again, nature-nurture. There’s a range of risk tolerance. We’re probably born with a range. It might be low, medium, or high within that universal range. But the way that we experience life and our caregivers and maybe watching our parents perhaps lose everything in the stock market or seeing some really early positive experiences within investing, that’s going to ultimately shape where we fall within our range.

It really is a combination of, again, our DNA, but also our early life experiences. I think that, again, when we’re thinking about raising kids, we’re back to that topic again, but it’s why talking through things that happen within your family can be so important, so you can explain what’s going on and why things are the way that they are, especially related to investing.

Meb:

All right, so let’s talk about some of the characteristics of people or investors and how you bucket them. I don’t know if this is a good time to hop onto the money traits or where, but I’ll let you guide this as you see fit. But what are some of the process you use at DataPoints to help advisors navigate this area?

Sarah:

A couple of the more traditional ways of thinking about investors are risk preference, which is just what we want in our portfolios, as well as risk personality. Those tend to be the two that are traditionally used. We do use them as well because we see that they actually predict what an investor will do in the future. The few that we add into that are based on academic research and our own research in terms of what predicts what investors will do. What will I do during a down market? Will I buy, sell, or hold? And that’s what we’re trying to, again, predict. We look at a couple of different things.

First and foremost, we look at what we call volatility composure. That’s the emotional side of investing. Again, it’s normally distributed throughout our population. Some of us are going to be fearless, we’re not going to experience those negative emotions very much, but others of us will, and we’ll want to feel better and we may want to take action when we shouldn’t. We measure that. Also, confidence. Of course, again, as you know, overconfidence can be a bad thing, but we’ve got to have some level of feeling like I can actually make good decisions in order to be a good investor. We measure that in a couple of different ways.

And then we also look at really an investor’s attitude about long-term investing. Do they view investing as something that is designed for the future, or are they thinking, okay, this is something I want to do and actively be involved in and trade frequently? They align it more with something like gambling versus investing. If you have more of that short-term view, you’re more likely to take action when the market goes down because that’s something that you are used to doing as well. Those are some of the things that we look at when we try to…

Again, our goal is to predict what a client will do so that we can help guide them to do something that’s more, again, beneficial for them. Those are some of the things that we use to do that.

Meb:

How is the average financial advisor that goes through this works with you guys, how are they using it? Is there a traditional use case? Is there a way that 80% of them use this information? Give us some insight.

Sarah:

I would say that the majority of the advisors that use our assessment are using them first and foremost to help inform what their asset allocation should be. That’s the check the box piece of it. But really where we’re seeing, again, more adoption for tests like this is in those conversations with clients. If I find out, for example, that my client is scoring low on volatility composure, I’d like to have a conversation with them so that I can understand that.

We give them interview questions that they can use to dive a little bit deeper, to learn a little bit more again about their life experiences or whatever it might be, so that I can then take that information and give them really a tailored resource guide or nudges or recommendations to help them improve. Again, we’re talking about nature versus nurture. Most of these things that we’re measuring are stable characteristics, but they can change somewhat over time, especially if you’re working with someone that’s going to be helping you change and adopt new habits and things like that.

That’s the typical use case is, again, using that one piece of information, the overall risk tolerance score, but then using the detailed insights for conversation for tailoring the client experience.

Meb:

What comes to mind, there’s a funny story. My buddy Dan Egan, who is at Betterment, has an unlimited sandbox in which to conduct experiments or whatnot, but he tells a story where they were sending out an email about, hey, don’t worry, this market volatility is normal. The stock market, you don’t have to worry about it. This is what’s happening. A certain cohort was like, wait, I should be worried? Why are you even emailing me? It’s interesting. I foresee sometime in the future, and that could be now, but getting there where you come almost like… I mean, people do this already for the last 100 years.

You got your Nervous Nellie clients and they do it just casually, but thinking on a much more systematic basis where almost your various communications or no communications, some clients are like, “Just leave me alone. I don’t want to hear about it. Just tell me once a year I’m okay and we’ll move on,” and thinking how to interact with people. Because like you mentioned, there’s a lot of scripts when people… You start the loop of some money experience. It turns on a little machine and it’s almost like it just plays out according to a software program.

I foresee a time in the future where you know could just plug that in and hopefully optimize on good behavior, but people are always crazy with money, so I don’t know.

Sarah:

I know that story that Dan has told for sure, that if you’re reaching out, like you said, to clients that already feel that way, that are going to naturally get nervous, it can have a detrimental effect. Knowing that and then being able to tailor the kinds of communication that you’re giving to your client. Certainly we see that in FinTech that that’s the way things are heading. But I think that, again, that’s the reason that you want to get to know your client at a deeper level too.

Meb:

As you think about these personality traits, how often are they overwhelmed by what’s going on in the world? I mean, the most recent example obviously is COVID. Pretty crazy time. And for the older cohort, global financial crisis as well. Are there times when the actual state of what’s going on in the world overwhelms how people think?

Because I feel like there’s entire years and decades where it’s one regime that everyone’s used to. Currently thinking about almost our entire lifetime, the ’80s, the ’90s, 2000s, it was interest rates coming down in the US. And all of a sudden, we have a new environment, which is interest rates running up and higher inflation. What’s the interplay between those two and who wins in the end?

Sarah:

Yeah, exactly. Well, thinking about, and you mentioned this, the state piece is how we are feeling right now. How do I feel today about investing? That does tend to change depending on what’s happening in the environment or what’s happening in my life, their feelings, their moods. There’s a lot of different terms for them, but they don’t tend to be the kinds of things that will predict what I might do in the future. But at the same time, that stable characteristic we just talked about, that volatility composure, others call it the emotional side of investing or neuroticism is another personality term for it, but that does indicate how often a client might feel those negative emotions.

If everyone’s worried about investing today, the clients that are scoring low on that volatility composure, they’re even more worried than your average client. They do interact. They do play together, if you will. That’s our goal at Data Points is to predict what a client’s going to do and help them make the best decision they can. Again, we want to still focus on those stable characteristics.

Meb:

Are there any unique… As anyone who runs a company often knows, you have this offering or service, and then people sometimes will use it in a way you weren’t expecting. Meaning as you’ve worked with advisors over the years, are there any insights learned where you’re like, oh, okay, I wasn’t really expecting you to use this this way?

But my thinking is largely they’re using it, A, on the onboard, okay, I want to understand who you are, what drives you, B, on the continual communication and keeping you behaving, or said differently, not doing really dumb stuff, but also maybe perhaps putting in systems in place that say, okay, well, let’s put these roadblocks or Taylor calls them nudges that just push you in a slightly different direct… Are there any takeaways as you’ve iterated over the years that are interesting?

Sarah:

When we first started, we were very focused, like I said, on prediction. How can we predict what the clients are going to do? But then shortly thereafter and especially early on, we worked with a lot of I would say younger advisors that were advising maybe clients that were new to financial planning, new to investing. They really helped us to create a tool inside the tool that would allow for those nudges. If my client is scoring let’s say low on a certain area, investor confidence, how can I help them on a weekly basis in an automated way improve in that area? Maybe I want them to read five minutes of an investing related website or something like that.

That’s been really cool to see if our advisors adopt that. Again, not all advisors are comfortable doing that and having that as part of their process, but certainly those that have more of a focus on coaching are open to that. And then I think the other thing that, again, maybe is surprising, maybe it shouldn’t have been surprising, is just how often our advisors, and we’re seeing them use it this way, are comparing spouses, because we’re all unique. Every time someone starts working with us, right away they’ll say, “Well, can I just give one test and can both members of the household take it?”

Well, we’ll no, because we’re all unique. We all have a unique profile. We do see advisors using those insights to anticipate, again, where there might be disagreements, where, again, the clients aren’t on the same page, whatever it might be. We’re seeing that as well in terms of a surprise, if you will.

Meb:

How often are the financial advisors incorporating this for themselves? We have over 140,000 investors in. It’s the full span, retail, institutional, advisors. I like to say the big dudes are just as bad at some of the emotional investing problems as retail is. They love to chase performance. I wonder how many advisors actually would benefit from saying, “Oh, wait a minute, I’m coming to my practice or I’m coming to this with my own biases already,” and trying to work with me and working with these clients maybe different than someone who comes with these traits working with the other type of clients? Is there much feedback on say you got to go through this program too and help you out?

Sarah:

I love that. In terms of the last time we did looking at the data for, for example, financial planners, for the most part, we saw that they were really solid investors from a personality perspective. They looked like, again, what we would call a high profile, like I said, from a personality perspective. Again, if you talk to anyone from the financial therapy world or any of those things, where advisors could benefit even more so is around things like money beliefs, money scripts, and things like that.

We have the Klontz Money Scripts Inventory on our platform too, we partner with Dr. Brad Klontz, where there are some hangups about money that they maybe haven’t dealt with that then they’re bringing into the relationship with their client. That’s different than talking about investing related characteristics. But I do agree with you that those that are looking for returns and things like that, they might score a little differently on that investor profile. But the money beliefs and our money experiences can impact our biases about our clients too.

That’s often why financial therapists will recommend for advisors to uncover some of those things about themselves before they’re meeting with clients.

Meb:

One of the things that I think is interesting is we spend so much time thinking about as advisors and investors how to save money, how to invest it, and very little time is spent thinking thoughtfully about how to spend it. A lot of the investors who have a financial advisor, the people that are millionaires, have already “won the game.” They’re at a good place in life. They have disposable income and wealth, but they were also never really taught all these money scripts that play out and hurt us or help us, but, whatever, guide us down a certain path on the investing side may not roll over into how to thoughtfully spend it too.

How often is there a strong amount of tension between say couples where, all right, you have two people, they have totally opposing traits as far as how they think about money? I mean, I think my personal experience, my parents could not have come from two different worlds when it came to this and it caused them a lot of stress. How do you guys think about that? Anything people can do other than understanding?

Sarah:

Right. I mean, I think certainly taking some time to understand each member of the household background, their experience can be very helpful. I know that when we were creating our retirement approach assessment, we looked at what you expect for a retirement, what you want to do in retirement, I, of course, made my husband take it because he’s the Guinea pig for anything that we do here. When we both took it and compared our results, we realized we were not on the same page. Again, we’re not super near retirement, but it led to some conversations about why are we doing all of this, why are we working and saving and all those things.

I think, again, certainly having some objective or third party step in to say, “Hey, this is how you guys are viewing things. Now let’s have a conversation about maybe how you can get on the same page,” is useful and helpful. I don’t necessarily have data on how many clients are similar in terms of their personality and things like that. But again, we know that money conversations and money disagreements is one of the key causes for divorce and things like that. Again, as an advisor or a professional working with a couple, if you don’t know what some of those disagreements are from the get-go, you may be, again, speaking only to one member of the household.

If you start talking about, for example, again, just using an example from those that tend to be younger, newer to financial planning, but if you go into a conversation, you’re talking about budgeting and one of the members of the household loves that, had great experience growing up with budgeting, thinks it’s the greatest thing in the world, and the other member of the household is shut down, their blank stare, that was not a great experience for them growing up, maybe they had an overly frugal, let’s say, parent that made life really hard, not knowing that in advance can really lead to some just right off the bat having a negative experience with an advisor.

Again, whether you use a tool, a test or an interview question maybe with couples, something to help understand where each member is coming from can be useful.

Meb:

Can we make any broad generalizations about men and women and how they come to this, or is it too random to make those summaries?

Sarah:

Good question. I’ve been asked this a lot lately. There are differences in terms of personality between men and women. Again, even identity roles and things like that when it comes to personality. Certainly that impacts money as well. We did a study a couple years ago looking at gender differences and different roles in the household. Oftentimes, if that’s the kind of relationship that you’re dealing with, men end up being in charge of investing related decisions.

The woman in the household is often just nodding her head and agreeing, but may not feel empowered, may not feel like, again, she’s getting educated about investing and things like that. I think that that’s somewhere or rather a place where advisors can really help and provide resources that are geared toward each member of the household in order to empower both of them in those decisions.

Meb:

You guys have a good paper, hopefully we can link to it in the show notes, understanding great investors that walks through some findings that I think are pretty interesting. As people can go to your DataPoints, they can sign up for free trial, is the main customer financial advisors or are there other offshoots that are really interested in what you guys are doing and can incorporate into the world too?

Sarah:

Definitely financial planners. Certainly we work now with a lot of financial coaches and also coaches of advisors. Those that are helping advisors grow their practice and becoming more comfortable with some of those conversations that, again, thinking about a couple that can be a little more challenging that aren’t necessarily the dollars and cents and the numbers. Those tend to be our main customers. We’re also seeing, again, more I would say life coaches or those that are even outside of the financial world beginning to use our assessments as well. But those tend to be the ones that are focused in on really understanding, again, financial personality.

Meb:

Is this all set in stone? Do people change? Once they have these childhood beliefs, I don’t know if you guys have ever even looked at this, but looking at people over time, are they able to adapt and improve? I mean, improve is the wrong word because it is what it is. Or is it more just people are set? I’m thinking in my head as maybe the 20-year old me might have had a different approach than the 45-year old me. Any thoughts there?

Sarah:

You certainly can change, and we see that even if what we call an intervention isn’t conducted. You can think about maybe older people in your life that have become nicer as they’ve gotten older, or meaner, I don’t know, whatever it might be. Certainly things can change. But often if you want to see quick change or I would say more significant change, that will take some kind of intervention, whether that’s a coaching engagement or, again like we were talking about, nudges, things like that.

We work with a financial coach who uses money scripts, for example, to walk her clients through essentially rewriting a script, rewriting a money belief so that they can have a more positive experience and make better decisions. But that takes time and it also takes some effort on our part too to change. No, things aren’t set in stone. I’m thankful that the 20-year old me is not making some decisions right now for sure.

Meb:

No, it’s fascinating. It’s hard, because I mean, 100 years, whatever, everyone’s expectancy is now, it seems like a really long time, but there’s so many unique and different macro environments. If you ask someone who has lived in a country with hyperinflation or an emerging market where the currency has declined or all these different environments, the US despite its pretty wide range of outcomes over the last 100 years is still probably much more stable rather than in other countries too.

It’s interesting how these play out over time, and who knows what we will be talking about in 10, 20, 50 years when it comes to some of these topics. While we’re still on the topic of DataPoints, anything else that we missed that I think is particularly insightful or interesting that you think would be worth touching on in this area?

Sarah:

I think the only other thing I’ll say is most firms do some kind of client survey. They’re trying to find out about whether it’s service or the satisfaction with their advisor or things like that. Again, whether you’re using our tests or another test or some form you’ve put together yourself, those are things that you can measure. You can measure characteristics. You can learn more about your own clients, and that can inform marketing more at a global level versus just at the individual level. That’s one of the things we help our clients do on our platform, but you can certainly do that as well.

That can help inform, again, the kinds of blogs you write. If I know that most of my clients are scoring low on, again, whether it’s volatility composure or confidence, how can I help educate them at a group level? That’s something that, again, why assessments can be helpful, but you can certainly do that with other tools as well. Just wanted to mention that.

Meb:

I mean, it’s fun having these conversations, because I start to think of some ideas just for our own world, part of which is dealing with a lot of institutional investors who you can tell by the questions they’re asking that they’re going to be a problem in the future. For example, the performance chasing example, where I almost want to say, look, I’m happy you’re buying this fund or partnering up, but I want you to think about these three things now. Because when we’re having this conversation in six months, I think it’ll be additive to your process.

We do a lot of Twitter polls, like I said, and one of them was, do you establish sell criteria when you make an investment, meaning you buy something? And most people what they do, they buy it, then they just wing it, see how it goes. That can be fine for a lot of people, but often they see it go down, they start to have some emotions, or they see it go up and they start to have emotions. I think it ends up causing a lot of bad behavior. I think trying to come up with a little not questionnaire, but it’s like, hey, here’s three points to think about today.

When you bought this, thanks for partnering with us. But in six months when you’re like, “Ah, this fund’s underperforming,” I say, “Let’s go back to the original list as you bought this with a time horizon of five to 10 years with the full understanding that any active strategy can underperform or outperform in any given year or two years in a row,” whatever. Sorry, going on a spiel right now, but no one does that, right? They jump in the pool and then figure it out afterwards.

Sarah:

Well, I was going to say, I think in the book Quit, I don’t know if you’ve read that book, but it’s dealing primarily with business owners, but it could be anything. Setting up in advance the reasons why you’re going to stop what you’re doing from an entrepreneurial perspective. Definitely it’s very similar in terms of what an investor should be doing, whether, again, it’s an institutional investor or otherwise, because you’re not in that emotional state where you’re feeling like you’ve got to take action. I certainly can see that as a small business owner myself knowing that, hey, here’s some criteria that you thought about when you said you were going to start a business. It’s very similar.

Meb:

I’ve heard you say, not that this applies to me, but shouldn’t tell your kids we’re wealthy. Did you say that? Did I read that?

Sarah:

That’s what millionaires say, right, that they shouldn’t tell them. But I think again, telling comes in a couple of different ways. We can tell them by the things that we’re buying. Again, that doesn’t always equate to wealth, or you can talk about what you’re making and income levels and things like that. But I think because of the way that our brains are wired when we’re young, when we’re adolescents, when we’re teenagers, it doesn’t mean the same thing. We take, oh, you’re making $200,000 a year, you’ve got a ton of money because I only need this much to get by.

That often can lead to just a myth about the family and where they are. Yes, we’ve seen that time and time again from millionaires that they really say don’t share that with your kids. Again, there are a couple of different ways to do that too.

Meb:

There’s a funny Shaq quote, and he’s got a few variants of it, but it’s basically when someone asked him about this, he told his kids, he says, “We’re not rich. I’m rich.” He’s like, “You have nothing.” He’s like, “I have a lot of money, but you have nothing,” which I think is thoughtful. But there’s an old phrase and maybe you know, but I don’t know the origin, but it’s basically along the lines of show me your calendar and your checkbook and I’ll tell you what you care about.

Thinking of talking to kids, do as I say or do as I do, if you live a very ostentatious lifestyle and you project that things you really care about are material, whatever it may be, I think the takeaways, they pick up on what you do probably a lot more than just saying, “Hey, this is how you should think about money anyway.”

Sarah:

Right. Yeah, absolutely.

Meb:

Listen to Shaq. What’s the state of personal finance literacy today? You guys have sold millions upon millions of books helping to educate people about topics of investing and thinking about money and the characteristics. Has it improved? Is it still impossible? What could we be doing?

Sarah:

I think a couple things there. I do see that things are changing. We’re seeing high schools require classes and things like that. Certainly there’s tons of resources. I mean, I think The Millionaire Next Door started a trend, if you will, in the personal finance book writing business. But I think that even with literacy, there’s still a lot of personality components to the way we make decisions, and that’s, again, self-control, planning ahead, not caring about what everybody else is doing.

All of those things have to be taught and bottled as well or the financial literacy is going to fall flat, meaning even if they’re taking classes in high school, but they’re still really interested, the kids are still really interested in doing what everybody else does. Again, it’s not just kids, it’s all of us. It doesn’t matter how much knowledge you have. I’m still going to want to have the same cars as everybody around me. I think it’s a combination, and I don’t see that that’s emphasized as much as it should be in terms of education. It’s not just knowledge. We’ve got to have the personality side too.

Meb:

I think I’m optimistic. I think it’s teachable. I know a lot of people don’t, but I’m in the cohort that thinks we could take a shot. You can take this two different ways. We normally ask the investors on the show what’s been their most memorable investment, good, bad, in between, but we can take this with you a separate way and you can pick your path. You could also answer, what’s been your most memorable insight from all these studies you’ve been doing over the years? Any main things that really stand out. It could be conversations, sitting down with people. Any moments that come to mind?

Sarah:

I think what comes to mind is, again, just having individuals that now that I’m in the financial services industry coming up to me and saying, “I heard your dad speak however many years ago, or I read The Millionaire Next Door in the ’90s and it’s still something that I recommend to other people, or it changed my life.” I mean, I guess that’s not maybe really what you’re looking for, but I think that continuing on in this field and helping people to, again, be able to achieve the goals that they want and continue the work that my dad started, it’s rewarding certainly.

I guess if I had to pick one of the stories, I still love the story of Dr. North and Dr. South and how one was really focused on the outward signs of being a doctor and being successful, and the other was really focused on building wealth. I mean, they two really are two different things. That story continues to stick with me. I continue to try to teach that to my kids who come home and tell me about all the cars in the high school parking lot.

Meb:

As you look out to the future, 2023, what’s on your mind? What are you excited about? What are you guys working on? Anything in particular behind the curtains or got you worried or confused? What’s on the brain?

Sarah:

Definitely we’re getting more requests for things like AI related to technology tools for financial advisors, which I think is awesome. I think there are so many things that can be done there. I think it’s called the creepiness factor. We do have to remember that clients are people and that they don’t necessarily want their advisor knowing things without them telling them, if that makes sense.

Do I really want my advisor telling me that they know things that I’ve posted on Facebook and that maybe have been scraped up? I’m not sure. I think there’s a balance there. I think that, again, the financial services industry is going to have to deal with that piece. Because at the end of the day, we’re still human. We still want to have a relationship, and that AI can help inform it, but shouldn’t be the sole piece when I’m coming to an advisor in terms of what they know about me.

Meb:

Sarah, where do people go? They want to find more from you guys, sign up for a free trial, read some of your writings. Well, what’s the best spot?

Sarah:

Yep, datapoints.com/go, and that’s where they’ll find a test they can take. You can take a personality test. You can take our retirement test there and learn a little bit more about what we do.

Meb:

Awesome. Thanks so much for joining us today.

Sarah:

Thank you for having me.

Meb:

Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at themebfabershow.com. We’d love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.