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How advisors can make better decisions

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Making decisions is hard. And financial advisors have to make a lot of decisions.

Of course, advisors want to be right, but, being human, must contend with their personal biases and potential conflicts of interest.

“Smart people do dumb things,” says Daylian Cain, senior lecturer in negotiations and ethics at the Yale School of Management. “One of the best tools to make better decisions is to consider the opposite [of what you want to do]. Consider how you might be wrong.”

On the corporate level, that means business leaders need to create a culture where their ideas could be wrong, Cain told wealth managers at the Investments & Wealth Institute’s recent Investment Advisor Forum in New York.

The key is to make criticism safe within your firm, according to Cain, who teaches a course in “Leading Effective Decision-Making” with Professors Paul Bracken and Nathan Novemsky at Yale.

"You want to have a team that is looking for what could go wrong," says Daylian Cain, senior lecturer at the Yale School of Management.
"You want to have a team that is looking for what could go wrong," says Daylian Cain, senior lecturer at the Yale School of Management.

The problem is that criticism is socially awkward, Cain acknowledged. What’s more, subordinates can feel their job security is threatened if they disagree with a higher-ranking executive at their firm.

Cain cited the example of a restaurant owner asking diners, “Was everything okay with your meal?” Few people, he noted, want to criticize the food or the restaurant and embarass the owner, even if there were things they didn’t like.

A better approach, Cain suggested, is for the owner to say “We’re always trying to improve. Are there one or two things we could do to make things better?”

Similarly, decision-makers at a firm should consider putting together a team of employees tasked with finding flaws in a proposed course of action.

But the team’s analysis needs to be specific, Cain stressed. “Ask your ‘red team’ to find five things wrong with Plan A, write them down and give them a deadline.”

You don’t need to do what your critics say, but you should know what they are saying.
Daylian Cain, senior lecturer, Yale School of Management

The environment for conducting this task, whether over days or weeks, should be comfortable and collegial, Cain said. Members of the red team can remain anonymous to the rest of the firm. Different employees should be selected for each analysis and employees should be rewarded for participating with incentives such as bonuses or a promotion.

“Keep [the vetting process] impersonal,” Cain told Financial Planning in an interview. “You don’t need to do what your critics say, but you should know what they are saying behind your back. I teach professionals how to better hear critical voices.”

Wealth managers can improve their decision-making abilities by approaching the problem from a different perspective.

When making investment decisions, for instance, they can spend too much time attempting to predict which of many possible future scenarios will come true, Cain said.

Instead of focusing on deciding whether equities will rise or fall, he says, advisors would be better served by planning for each of the various scenarios that may occur.

“Good advisors emphasize planning over predicting,” Cain said.

Keep brainstorming what could go wrong and consider different points of view.
Daylian Cain

For advisors considering a merger or acquisition, Cain recommended the strategy in the book, Decisive: How to Make better Choices in Life and Work, by Chip Heath and Dan Heath, which counsels firms involved in a merger or acquisition to place “tripwires” at various junctures in the process.

“You want to have a team that is looking for what could go wrong,” Cain said.

The team should “frequently monitor various small milestones to look for evidence that the synergies of the merger are not within expectations,” he told Financial Planning.

“If you predicted that synergies will increase 12% within two years, ask what they should be, at a minimum, within three months, six months and nine months,” Cain explained. “Then, validate that those measures are being met — or not.”

Using this process early in the planning phases can allow a firm’s executives to “lead more confidently during implementation,” Cain said.

As with every decision, he emphasized, “Keep brainstorming what could go wrong and consider different points of view.”

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