Jonathan Clements: Two things good advisers do
Jonathan Clements’ working life, like mine, straddles both the media and the financial advice profession. Educated at Cambridge, he was a senior writer for the Wall Street Journal for almost 20 years. He now works as a writer and blogger, and as Director of Financial Education for Creative Planning in Leawood, Kansas.
In this interview, Jonathan discusses his latest book and explains why he expects both indexing and the use of robo-advice to grow. But he also explains why face-to-face advisers will continue to play an important part, principally in educating clients and changing their behaviour.
Your new book has an intriguing title, From Here to Financial Happiness: Enrich Your Life in Just 77 Days. What was your motivation in writing it?
While I have nothing but scorn for commission-hungry brokers and product-pushing insurance agents, I have great admiration for fee-only advisers who are informed by sound financial thinking and take a holistic approach to clients' financial lives. I like to think that From Here to Financial Happiness is not unlike a good financial adviser. It offers readers a chance to think hard about what they want from their financial lives, and then helps them to figure out what steps they need to take to make that happen. I've now written eight personal finance books, and this is easily the most practical and action-oriented.
The book encourages its readers to spend just five to ten minutes a day to think about their money, their habits, their goals and dreams. Is it possible to bring about a significant change by devoting so little time to it?
In 11 weeks, you can make great progress in figuring out where you stand, what you want and what you need to do. But I'm not going to oversell it. True financial progress takes decades: the diligent saving of money, the compounding of investments, the paying down of mortgages. But with any luck, From Here to Financial Happiness will help readers get started on that journey.
For many years you’ve argued that most investors should have simple portfolios of low-cost index funds. How did you come to hold that view?
Early in my investing career, I owned actively managed funds and dabbled a little in individual stocks. I was neither particularly successful nor unsuccessful, so that wasn't the trigger. Rather, what drove me to become such a persistent advocate of indexing was both the evidence and the logic. Most active investors, both amateur and professional, lag behind the market. There's ample evidence to prove that. Indeed, it couldn't be any other way. Before costs, investors collectively match the market averages. After costs, they must, as a group, lag behind. Owning the market through low-cost index funds will always get you results that outperform most other investors.
You worked as a senior writer for the Wall Street Journal for almost 20 years. Does it frustrate you that so much of what passes as financial journalism is really little more than PR and marketing for the asset management industry? And do you think that’s changing?
I can't speak to the situation elsewhere, but in the US, things have improved, at least among print journalists. The media's two great sins are fretting over short-term market performance and making readers think they can beat the market. In US newspapers and magazines, you see less of that sort of coverage. Partly, it's because journalists have wised up. But partly, it's the collapse of profitability among media companies. Newspaper and magazines are thinner, with less space to tout star fund managers and harp on yesterday's market action. Instead, a lot of that nonsense has migrated to the web. It is, of course, also a mainstay of business television.
You were succeeded at the Wall Street Journal by Jason Zweig. Indeed I understand you recommended him as your replacement. Is that right?
Yes. I was hired as a lowly fact-checker at Forbes magazine in October 1986. Jason was the next fact-checker hired, so we've known each other for many years. When I decided to leave The Wall Street Journal for the first time, in 2008, I recommended that the Journal hire Jason to replace me — and I was thrilled when the paper did. My columns tended to have a practical bent. Jason's are more academic. He's extraordinarily well-read, and not just about the two topics he's best known for, value investing and behavioural finance. When people compare Jason and me, I always assure them that Jason is far smarter.
As you know, the UK is way behind the US in terms of the take-up of low-cost indexing. Why do you think that is? And do you expect that to change?
When index funds first became available in the 1970s in the US, Wall Street dismissed it as a know-nothing strategy for those inclined to settle for mediocre returns. But truth has triumphed. Today, indexing in the US is widely viewed as a sophisticated strategy for informed investors who want results that are guaranteed to be better than those achieved by the vast majority of active investors. Eventually, the evidence will also sway many UK investors.
Tell me about your blog, HumbleDollar.com, and what you hope to achieve with it.
I view HumbleDollar as a public service. It's my way of giving back. It takes up most of my time, and yet it barely breaks even. It's the place where readers end up after they've made their mistakes, and they're ready to settle down and become financial grown-ups. If you read the articles, you'll see two persistent themes. First, when we make financial decisions, we should try to be guided by the evidence and by logic. Second, money is inseparable from our larger lives. We all have different worries and aspirations. How we manage our money and how we use it may not appear strictly rational, but it may make entire sense, if it helps us to lead happier, more fulfilled lives.
You’re also Director of Financial Education for Creative Planning in Leawood, Kansas. In your view, how important is it for advice firms to be investing in client education?
Good advisers do two things: they educate clients and they help them to change behaviour. Education on its own can be ineffective. To make a difference, advisers also need to help clients to modify their behaviour. That might mean saving more, putting a halt to impulsive financial decisions, thinking longer-term and, on occasion, perhaps encouraging the thrifty to spend more.
Finally, how do you see the investing industry changing over the next ten years or so? For example, will the trend towards passive investing continue? And do you still see an important role for face-to-face financial advice?
I think the trend toward passive investing and toward automated advice will undoubtedly continue. The logic of indexing is irrefutable, while human advisers are simply too expensive for investors with modest portfolios. But families with larger portfolios will continue to demand face-to-face advice. Even advisers to the affluent, however, will make increasing use of technology, which is a great thing, because it frees them up to focus on coaching clients toward better behaviour. I also think the cost of advice will come down. Today, financial advisers in the US regularly charge 1% of assets. I suspect that'll drift down toward 0.7%, and for that 0.7%, clients will expect not just portfolio management, but also help with estate planning, financial planning, insurance, taxes and more.