You’re probably aware that the US housing market is on a tear because of the COVID-19 pandemic. Mortgage rates are at historic lows, and demand for new houses is off the charts. As more people accept that working from home may become permanent, there has been a massive flight from urban areas by families looking for larger houses with more land. After working in cramped conditions for nearly a year, many people have cried uncle and are bidding up properties in the suburbs.
I have a good friend who is the poster child for this process. A senior executive in healthcare, he transitioned immediately to working from his apartment. As weeks dragged into months, he worked down the hall from his spouse and pushed their two cats off his desk several times a day (usually when in a Zoom meeting). Something snapped when his company decided that working from home would become a highly recommended permanent option, and he decided it was time to relieve the pressure and relocate.
First, the Good News
I recently got an excited call from my friend updating me on the progress. Not only did he and his spouse find a bigger house on a nice piece of land within a reasonable drive of their offices, but they found their dream home. It has an open floor plan, a European vibe, a new kitchen with beautiful appliances and a huge deck across the back of the house. He told me, “If the realtor asked me for my top 20 wishes, I couldn’t have described it more perfectly!” This comment was from my buddy who is never excited about such things.
Then he told me about his conversation with his advisor. They’ve worked together for years and have a solid relationship. My friend wouldn’t execute a decision like this without checking in and running the numbers with her. The response he got was, “You’re in great shape to do this! It won’t impact your long-term plan at all. You’ve worked hard and managed your finances thoughtfully. Enjoy the fruits of your labors!”
And that was the end of the conversation.
Now, the Not So Good News
My friend secured the deal after a bidding war (welcome to buying a house in 2020!). Then his realtor offered a recommendation for a funding resource. It’s pretty clear that he won’t have any problems getting a very attractive loan.
But wait; something’s missing. Why is my friend getting a loan from a stranger when he has a multi-decade relationship with a great financial advisor who could handle the mortgage financing herself?
What I find interesting about this situation isn’t that it’s unusual but that it’s actually commonplace. This is the second time I’ve heard a friend discuss a potential real estate purchase with a long-standing financial advisor who never thought to explore a mortgage with the client!
What’s Going On Here?
There certainly could be a good reason for this. Maybe the advisor’s firm doesn’t have a competitive rate compared to other options. Or perhaps the advisor had a bad experience with other clients and is reluctant to risk doing so again. It could be that the mortgage process is a daunting, time-consuming task for which the advisor isn’t adequately compensated. There are many reasons for neglecting this opportunity.
But I suspect that those reasons aren’t the real reason that advisors are neglecting these opportunities to fully engage with their clients. After all, advisors at every firm that offers mortgages know they must be competitive. Years of research have revealed that more transactions with clients lead to longer-term, more financially productive relationships. Advisors are well educated about the terms that are available and are often supported by a specialist who is eager to facilitate the transaction.
I believe the real reason that these advisors don’t talk about mortgages is because of a built-in decision-making vulnerability that every human faces when dealing with complexity: a heuristic called narrow framing. As behavioral scientist Daniel Kahneman teaches in his book Thinking, Fast and Slow, a heuristic “is a simple procedure that helps find adequate, though often imperfect, answers to difficult questions.” He explains, “You will not be stumped, you will not have to work very hard, and you may not even notice that you did not answer the question you were asked.”
What’s the Bigger Question?
Importantly, my friends didn’t inquire about a mortgage. In both cases, the question the advisors were responding to was, “How does this situation impact my investments?” The advisors narrow-framed their assumption about their roles in their clients’ lives in order to simplify their task. The reason narrow framing is so common—and so insidious—is that it’s an excellent way for the human brain to make a complicated situation simpler and easier to manage.
For the advisor, seeing the world through the lens of the investments makes client management simpler by limiting the scope of her advice. From an outside perspective, this raises two questions: “What is the proper scope of attention that an advisor should have?” and “Where is it appropriate for the advisor to draw limits?” Another way to ask these questions is: “Just because advisors can offer a mortgage, should they offer it when the situation presents itself?”
But there’s a much bigger question: “What should I be offering to my clients?” Answering this well requires the advisor to practice broad framing: she needs to consider a wider range of solutions in her Standard of Care for clients. This will lead to many more conversations about a wide range of solutions with a lot of people. Now, consider these even bigger questions:
- What do retail financial advisors owe to their clients as a Standard of Care? In other words, how robust does a Standard of Care need to be?
- What do clients assume is true about the advice they are getting? What would clients want if they knew everything that was available from their advisor?
For more information about designing a robust Standard of Care, call the AllianceBernstein Advisor Institute at (800) 227-4618.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.