Financial Illiteracy and You - Part Four: Codfish With Boots On

What in the world does wearing “Codfish with Boots On” have to do with financial illiteracy? More than you think. Read on. When a person unfamiliar with money suddenly gets a pile of it, the result can be a train wreck. A classic example is lotto winners. Many end up broke or even go bankrupt.

“According to the National Endowment for Financial Education, 70% of lottery winners go broke.” ¹ A more specific figure is from “…the Certified Financial Planner Board of Standards [which] says nearly a third of lottery winners declare bankruptcy…” ²

Receiving lots of money out of the blue sends people into a place so unfamiliar it may as well be a foreign country with a foreign language they can’t comprehend.  Let’s illustrate this analogy with about the aforementioned codfish. In 1940, after Nazi Germany seized Denmark, Great Britain landed troops in Iceland to occupy that country, then a Danish colony, to prevent Nazi Germany from occupying it.

The Royal Navy didn’t think much of the place. “If there’s one place I hate more than another its Iceland. Even the Danes can’t stand it. They have a word for its inhabitants, which means ‘cod-fish-with boots on,’ ” so wrote Lt. Graeme Ogden who served on a Royal Navy convoy escort ship in World War Two. These escorts typically refueled in Iceland.³ Can you imagine being in a place so strange the only way to insult the locals is suggest they are codfish wearing boots?         

I’m being facetious to a degree, but this is how strange and foreign our world seems to people with no experience with money. They don’t know anything and do foolish things—in fact; many get fleeced.

What do most people who are financially illiterate do when they suddenly become “rich beyond the dreams of avarice?” ⁴ They panic. Over the years, all of us in the trade have talked to people who have come into a large sum of money through winning the lotto, inheritance, or what have you. These people often seemed to have one thing in common; they felt they must immediately do something with the money.

They have conflated people who spend money with people who have money. This is a classic fallacy in logic. People who have money spend money. I now have money. Therefore I should spend money. No wonder they go broke.

What actions should you take as an FA with a prospect or client like this? First, you can do some basic questioning. 

“Why do you need to do something immediately?” says Ms. Moneybrain. (That would be you).

        “Well, you know….I just feel I should.”

“Uh, why do you feel that way?”

        “When I grew up, everyone said the wealthy businessmen in our hometown, Mr. Whippoorwill, knew a lot about money because he owned twenty-seven laundromats, three pool halls, an exotic dance club, and lived in the biggest house in town.”

“All of that and the biggest house in town?”

        “Yes, Ms. Moneybrain. He sure did. I didn’t know him, but I am certain he would never let money sit around. So I shouldn’t let my money sit around. I also heard this on Dr. Phil, I think.”

At this moment you want to calm down this prospect. If you do, they are far more likely to open an account with you. Reason? They worry they are going to get fleeced if they choose the wrong financial adviser, not an unreasonable assumption. They are searching for peace of mind. So be soothing and radiate peace of mind. 

You don’t need to consult Sigmund Freud to figure this out. All you need to say is something like, “I would suggest we do nothing for six months since you don’t need to take action on anything immediately. We can work together over time, you can learn more about investing without any pressure, and if something comes up that must be dealt with, I will tell you and make a recommendation.” In fact, you want to be so soothing and so reassuring that after leaving your office, the person says to themselves, “I’m sure glad I talked to Ms. Moneybrain. I feel so relieved and have such peace of mind.”

Of course, as we all learn painfully as FAs, people are fickle. So don’t let that person leave until she has open an account and arranged for you to get the money. Remember, to be in the business of giving well-reasoned and honest investment advice; you have to stay in business.

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Resources:

1 https://tinyurl.com/ClevePlainDealerLottoWinners

2 http://fortune.com/2016/01/15/powerball-lottery-winners/

3 My Sea Lady: An Epic Memoir of the Arctic Convoys by Graeme Ogden

4 http://www.bartleby.com/78/883.html     

Samuel Johnson English writer and philosopher, 1781

Contributing Writer: Subject Matter Expert Charles McCain