#FASuccess Ep 039: Using Behavioral Assessment Tools To Really Understand A Client’s Wealth Building Potential with Sarah Fallaw

What You’ll Learn In This Podcast Episode

• How DataPoints builds on "The Millionaire Next Door" research to understand what kinds of behaviors have true wealth-building potential [5:27]
• The top characteristics that help people transform and build wealth, and how conscientiousness translates into other wealth building skills [6:52]
• The concept of "social indifference" and how social media usage influences a person’s net worth [13:07]
• Exactly what is hard to coach and develop in clients, yet has the most effect on client success [21:55]
• How advisors can use coaching and relationship building with their clients to rise above the obsession with robo advisors [27:47]
• The way DataPoints is converting the wealth-building research into assessment tools that financial advisors can use with their prospects and clients [32:47]
• Using performance management as a model to draw the line between being a financial advisor and a psychologist [50:53]
• Sarah’s journey into studying financial behavior, including creating a product-focused company, focusing on industrial psychology, and her eventual interest in her father’s research [58:54]

Resources Featured In This Episode:

• Sarah Stanely Fallaw - DataPoints
• The Millionaire Next Door by Thomas Stanley
• NEO PI-R Assessment
• Hogan Personality Assessments
• Big 5 Personality Traits
• Risk Tolerance vs Risk Perception
• BioData & Garnett Stokes
• Financial Advisor Success Episode 3 with Caleb Brown
• Financial Advisor Success Episode 34 with Sheryl Rowling
• ShipIt by Seth Godin
• Upwork

Full Transcript: Using Behavioral Assessment Tools To Really Understand A Client's Wealth Building Potential with Sarah Fallaw

Michael: Welcome, everyone. Welcome to the 39th episode of the Financial Advisor Success Podcast. My guest on today's podcast is Sarah Fallaw. Sarah is the founder and president of DataPoints, a technology company that's creating behavioral science and assessment tools for advisors to use to better assess, understand, and coach our clients' financial behaviors. What's fascinating about Sarah's work with DataPoints, though, is the way that they've applied research rigor to the fundamental question of, what are the financial behaviors and traits that lead people to actually turn their income into wealth. Now, as advisors, many of us are already familiar with the concept of the mild-mannered millionaire next door who, through steady, frugal savings behaviors, has managed to accumulate substantial wealth without being flashy about it. Well, as it turns out, that original research was done by Thomas Stanley, who was Sarah's father. And it's his initial work that she is now extending even further and turning into a series of assessment tools that we as advisors can use with our clients.

So in this episode we talk in some depth about Sarah's research on how people really build wealth, what those key financial behaviors and traits really are, including conscientiousness, financial literacy, frugality, planning, responsibility, and confidence that lead to wealth building behaviors, why and how DataPoints measures social indifference, how sensitive you really are to trying to keep up with the Joneses, to really understand someone's wealth building potential, and the way that they've turned all this research into a series of assessment tools that we can bring to clients, whether it's giving the assessment to young accumulator prospects to really understand how likely they are to save and accumulate wealth and be a good long-term business client for us, or to give it to new or even existing clients just to better understand where their strengths are and where their potential financial challenges may be in the future.

We even explore how these kinds of behavioral assessment tools could eventually become a way that we show our value as financial advisors, where we provide the assessment to clients year by year and actually show them not just how they're accumulating wealth over time, but how we're actually helping them to change their financial attitude and behaviors for the better. And be certain to listen to the end, where Sarah talks about the challenges in actually launching a technology company that provides solutions for advisors, how "Perfection can be the enemy of good" is certainly true when it comes to getting a new company launched, and why even when it comes to starting a technology company, it's still all about focusing in on a narrow niche of a particular type of financial advisor that you want to serve. So with that introduction, I hope you enjoy this episode of the Financial Advisor Success Podcast with Sarah Fallaw. Welcome, Sarah Fallaw, to the Financial Advisor Success Podcast.

Sarah: Thank you for having me. This is great. I'm glad to be here.

Michael: I've been looking forward to this episode because you come to the podcast from a slightly different perspective, I think, than a lot of other guests we've had. You come from a background of psychology and have actually have been building a company, called DataPoints, that creates behavioral science tools and assessments for advisors, for us to use with our clients, to understand some of their, I guess we'll call it their psychology and behaviors around money. So it's one of those things that we all talk about. I find increasingly today as there's this obsession around robo-advisors commoditizing investment management, that we increasingly say about the value of the human is that we help our clients through all this behavioral stuff, yet there is almost nothing that even measures and assesses clients' actual behaviors and behavioral tendencies, never mind whether we're actually doing anything and having any impact. So I'm very curious, actually, for some of your perspectives around the fact that we spend so much time talking about how we help our clients with behaviors and have virtually no tools to actually help even evaluate what their behavioral traits are and whether we're having any effect at changing them.

Sarah: Yeah, definitely. I think that's really what brought me to this industry or helped me or allowed me to create this business, if you will, was the fact that there weren't really any tools out there like this. We kind of saw this several years ago when I started contemplating the business and how could we do this, how could this work, and saw the change. It felt like there was a wave of change in this industry, and of course you talk about it quite a bit, you know, related to, again, focusing on clients' behaviors, talking about things like budgeting and spending and making those sort of part of the conversation versus returns and what's happening in the markets. So that's definitely one of the reasons that it was really fun, I guess, to take this data and take the research that we do have and apply it here in the field and in the industry.

How DataPoints Builds On "The Millionaire Next Door" Research [5:27]

Michael: So maybe as a starting point, why don't you just tell us a little bit about DataPoints, your company. What is DataPoints? What do you do?

Sarah: What do we do? Right. So DataPoints provides assessments, so behavioral assessments for advisors to use with their clients to help them understand, assess, and coach and develop behaviors that will allow them to be successful over time. So that's kind of the short version of what we do. The background is that there are, in what we've found in the research that we've done as well as the research that my father did for many, many years, was that there are these characteristics of individuals that allow them to build wealth and specific behaviors that are conducive to transforming income into wealth, and if we could measure those and then help the advisor understand how to impact those behaviors with their clients, ultimately the client could be more successful. So that's, again, sort of the short version of what we do and why we do it, but again, really, the idea is, let's put something in the hands of both the advisor and the client that gives them an objective way of understanding their behaviors, and then a really, again, simple way of tracking recommendations and suggestions to help that coaching process over time.

Top Characteristics Of People Who Build Wealth [6:52]

Michael: So can you break this down for us a little bit further? Like when you talk about characteristics and behaviors, I love that language, that help people translate income into wealth. So I mean, what do you find? What are the characteristics and behaviors that you find that actually are this driver in outcome? I mean is this the kind of stuff that, at least we tend to think about, as advisors, all these things, like good behaviors include pay yourself first and spend less than you make. Are those the sorts of characteristics and behaviors we're talking about? Or what have you found?

Sarah: Right, so very similar to what you're saying. In terms of a characteristic, we might think of something like conscientiousness. So if you're familiar with the big five measures of personality, we think of individuals that are really conscientious, that can really pay attention to details, that kind of do what they say, that can stick to a plan. That tends to be, if you will, the underlying trait that kind of impacts whether or not someone can do all the things we just talked about. But again, from behaviors what we see is, that are related to that trait, are things like being frugal and taking time to research prices, and again, adhering to budgets, that are able to, again, stick with plans for the long-term, things like that. So those are kinds of things that we measure in our assessments.

Michael: So conscientiousness is like the high level trait characteristic, if I am more conscientious I'm more likely to exhibit behaviors like being frugal, because if I'm conscientious I actually pay attention to what I'm spending money on, taking time to price, I adhere to budgets because I'm conscientious enough to actually pause and think about, is what I'm spending actually consistent with my budget, and I don't just impulse buy, or stick with plans. So I get it, the conscientiousness kind of sits at the high level.

Sarah: Exactly. And just by way of comparison and going back to my background, that's sort of the mother of all personality characteristics when we're talking about helping organizations pick who they should hire. So if you can only pick one thing to measure outside of cognitive ability, let's say, it's conscientiousness, it's the best predictor of job performance. And really if you think about managing your household's finances as sort of that chief household financial manager, it again is one of the best predictors, from our research. There's other research backing that up as well.

Michael: We've actually had some folks on the podcast in the past that talked about assessment tools for hiring. So Caleb Brown, from New Planet Recruiting, does hiring of young advisors. So we had him on episode 31 talking about the tools that he uses in the hiring process, which were things like Kolbe Assessments around cognitive work styles. So are there actually job assessment tools that predict conscientiousness? Now that you bring it up, I'm kind of curious.

Sarah: Right. Now I'm curious. So for example the NEO PI is one of the assessments that's out there that measures the five factors. That's probably one of the more comprehensive assessments. There are other personality type assessments, like the Hogan, if you're familiar with the Hogan Group. They do a really good job of assessing personality for leadership and things like that. And just, again, by way of kind of in the hiring world, there's sort of a shift away, though, from using kind of that single trait to measure and hire folks. What they're really looking at are, again, sort of a comprehensive view of the job, and then creating assessments that are specific to what they're trying to measure.

Michael: Sure. Ultimately, I get it, not being conscientious means you're not going to pay attention to a whole bunch of details I probably care about as a business owner that's hiring you. But at some point there are probably a few other skills and abilities I need beyond just a conscientious person that I have to train to do everything. So I get it. So you found that this dynamic of conscientiousness that drives so much of job performance, and basically people's ability to focus on and care about the quality of their work, translates over to the financial realm as well, that people who are more conscientious are at least more likely to exhibit the behaviors that lead to translating income into wealth.

Sarah: Right, exactly. And just as you said earlier, or just a minute ago, there are of course other things that play into it, and certainly things like financial literacy or acumen, your skills at mathematics really, numeracy. So are you able to calculate percentages in your head quickly and things like that. Those all play into it as well, but if you think about from, again, in a household, especially if you're in a situation with a couple, right? So there's also that empathy and agreeableness and how well are they going to be able to kind of work through some of these financial issues long-term. So those come into play. We are sort of just on the cusp of looking at those issues as well.

Michael: Okay, so I guess ironically it seems like there's a double edged sword, to me, that people who are conscientious themselves are probably the ones that are most likely to be diligent about things like financial literacy and improving their numeracy, because if you're conscientious, you would be likely to notice that you don't have the financial literacy that you probably want, and realize that you may not be making good decisions. And the people who lack on the conscientiousness, unless they just happen to have some kind of innate math skills that makes the numeracy easy, are probably the ones that are the most likely to have trouble and the least likely to bother to try to become financially literate about it.

Sarah: Right, yeah. That's a great point. They certainly work together. At least, that's the idea.

How "Social Indifference" Influences A Person's Net Worth [13:07]

Michael: So what else do you find in the research that becomes a driver of these, I guess, positive or negative outcomes?

Sarah: Right, so I think the one that, I guess, captures the most media attention for us is certainly this concept of caring about what the Joneses think. So we call it social indifference, but it really relates to how influenced you are when you're purchasing something, how others influence you. So looking at things like whether or not you're paying attention to what's happening on social media related to your neighbors and friends and your friends across the country and what they're doing and buying and wearing. And we've found, again, a positive relationship between that component and net worth independent of age and income.

Michael: Truly, I mean, it is a valid phenomenon that the less you care about keeping up with the Joneses, the more you tend to build and create wealth, and the more you try to keep up with the Joneses, the less you tend to have good financial behaviors.

Sarah: Right, and again I think what we're looking at is kind of that compilation of scores and kind of the mix of all of those things and how that relates long-term to financial success. It's part of the research that we are doing on an ongoing basis. But yeah, absolutely. It's very interesting. And all of us get sucked into that sometimes, like, okay, how many posts are there on Twitter? And I can't keep up with that, for example, but that kind of thing.

Michael: So what other dynamics? There's an element of conscientiousness, there's an aspect of financial literacy and numeracy, there's a social indifference factor that drives some of these behaviors. So what other pieces have you found in the research that kind of bubble up into wealth-building behaviors?

Sarah: Yeah, so sort of related to conscientiousness, again, this this concept of focus, of not being distracted. So to the extent that we can kind of keep our eyes on our goals and not, even sitting and planning, for example, if you sit down and say to yourself, "I'm going to spend 30 minutes kind of researching and monitoring my finances," and five minutes in you're looking at ESPN because it's college football weekend. Whatever it is.

Michael: So people like me who are severely ADHD are not off to a good start on the wealth-building focus?

Sarah: Right, right. I'm not saying anything about that. The idea is, the more you can focus and the more that you can ignore distractions, the more likely, we've found a positive relationship. It doesn't mean it's a causation of that, but there is a relationship there.

Michael: All right. And I mean it makes sense. We deal with this all the time in the advisor context, that we're constantly trying to bring clients back to focus on their long-term goals and ignore short-term noise, and while I've never thought to label clients this way, it's certainly true. We have some people that are just really good at that, and then a bunch that we have to talk to every time something's going on in markets or life or wherever else it is. So yeah, I never thought to frame up clients that way, but I guess we just live it automatically in our lives. In our world some clients require more handholding to keep trying to get them focus back on their long-term goals, and others are just fine. They say, "Here's what we've got to do," and they're square and we see them every now and then, and it's fine. We just don't have to deal with much. So some of those are high on the financial focus scale and some are not so much.

Sarah: Yes, and that kind of goes hand in hand, too, with one of the things that we are researching related to investment decision-making. So part of, again, the science we use or the methodology we use to measure these things is the scientific measurement of patterns of behaviors and experiences. That's how we do the things we do and how our assessments are created. In psychology speak that's called biodata. But the idea is that again, we can measure these patterns of behaviors reliably and in a way that allows us to predict things in the future. So one of the ones, kind of going along with what you just mentioned, is composure. So composure related to loss. That comes up mostly when we're talking about things like risk and risk tolerance and investment decision-making, but that's something that we're researching and looking into as well. So that's been a really interesting line of research. How does that play into what's traditionally thought of as a risk tolerance questionnaire, and then again, how does financial acumen or literacy play into that, too.

Michael: Right. I've written about this a few times on the site from our perspective, that there are certain clients that seem to be more effective at maintaining their composure in the face of wildly volatile and fluctuating markets, and others that just can't maintain their composure, the perceptions swing all over the place. Like this week the market's up, so it's going to the moon, and then next week the market's going down, so it's going to zero. And they just literally can't maintain their composure, while others are completely fine.

Sarah: Yeah, definitely. Our hope is that if we can identify with our assessment those types of clients early on, that the advisor can be really equipped to either know that these things are going to happen in advance or help coach them. You know, is there a way to coach them so that they're not freaking out every time the market drops?

Michael: To me it makes an interesting point as well that...I think for most of us, we tend to think of who has bad composure and is likely to call me in a bear market or volatile market? I think our general go-to is basically, my risk tolerant clients are the ones who are fine, and my risk intolerant are the ones who are not fine, which is why my risk intolerant clients are the ones who get more conservative portfolios. But I feel like I've seen this for a long time just across clients over the years, that even on that scale, like we've got conservative clients who just aren't interested in the roller coaster. They're like, "I just want a moderate portfolio, and I'll get some reasonable growth and I'm fine." Then we've got a few that are conservative because they're just like the classic Nervous Nellie and if you do anything volatile, they're going to go off the wheels, but again, it strikes me, one of those is very good composure, just happens to be conservative.

The other one has terrible composure, and maybe that's why we dialed her down to be conservative or dialed him down to be conservative. But it's a reminder to me that it's not enough just to talk about tolerance for risk. Because at the other end of the spectrum as well, we've had risk tolerant clients that just want to take the risk and are completely comfortable with it. So I'd call them very composed. And then we've got the highly risk tolerant clients that basically feel like adrenaline junkies sitting across from them. The composure is terrible, they want the ride, but they're crazy excited and over-exuberant to the upside and then they're neurotic on the decline, and they want to take the risk and insist on taking the risk, but they cannot maintain their focus through the ups and downs.

Sarah: Right, and I've heard you discuss this, I think, in the past, too, the idea of deciding if that's a client, especially early on, that you would want to...That would be a challenging client. I guess that's the better way to say that.

Michael: Right, so you would want to know up front who's got bad composure, whether they're aggressive or conservative, because it's not really tolerant or intolerant of risk that makes them challenge clients in volatile markets. It's poor composure that makes them challenging clients in volatile markets.

Sarah: Right. Exactly, that allows them to call you every five minutes or something like that.

What Is Hard To Coach And Develop In Clients [21:55]

Michael: Yes. So you've got these different measurements, conscientiousness and financial literacy and social indifference and financial focus and composure. So are there other characteristics you've found as well that layer into this?

Sarah: Yeah, so one of them that's a little more, I guess, challenging, if you will, to coach and develop or talk about with a client is this concept of responsibility. That sounds really general. The psychological component is locus of control. So you might remember that as a psych major.

Michael: Yes, as a psych major I absolutely remember locus of control.

Sarah: So the idea is, does the client have a view that things that are happening to them is because of external reasons. So the economy or government or something outside of their control, or do I view things that happen to me entirely in my control? I did this, this all came about because of something I did. So there are good and bad sides to both of those. For the internal person, so the person that believes that everything that's happening is because of something that they did, tends to be really anxious, too. So even though in general we've found that people that do have that internal locus of control tend to be ones that can transform income into wealth, there's a flip side, there's too much of a good thing, whereas those that kind of view everything as happening to them or, "My parents didn't leave me enough money," or, "I can't get a job," or something like that, if they're constantly blaming others for their financial woes, that may be an indication that they're not entirely ready to take responsibility for their financial outcomes. So that component is really interesting. So we measure that in one of the assessments. That's a fertile area for coaching. It's a tough one, but it's something that can help the individual and the advisor understand, "Why are we seeing you behave this way? Well, maybe it's because you're not viewing that anything that you do will actually impact your financial success."

Michael: Right, so the responsibility dynamic here is very much a personal responsibility. I guess the literal version would be, do you take responsibility for your financial outcomes? But I guess, really it's more of, do you believe you are responsible for your financial outcomes in the first place? It sort of makes sense. If I really don't think that I'm responsible for my financial outcomes, there's no reason to save, because it might just go away, and there's no reason to try, because it might just come to me anyway. If the world just happens, I'm equally likely to lose my money in a disaster or win the lottery. So who really cares what I do? We'll just see what happens. Whereas if I think it's under my control, now working hard and saving literally feels rewarding. I think I can control it, I tried, I worked hard, I save, I get a good outcome, I can do this. So then I want to keep doing it and I start building wealth.

Sarah: Exactly. Yeah.

Michael: I guess with the caveat that if I think there's too much under my control, I just become grossly overconfident and end up doing really stupid things.

Sarah: Right, or you start thinking, exactly, it kind of goes hand in hand with confidence, which is something else that we measure, of course. You don't want to be overconfident. We know just from not only our research, but tons of research on this that overconfidence in investing is not a good thing. But you do have to be confident in decision-making. And that is somewhere where advisors, for example, can really help their clients, is to help coach them to be more confident in their financial decision-making either through education or recommending small steps towards that. So I think that's one area I really feel like advisors that are concerned about making sure their clients are doing the right thing can really impact them.

Michael: So help me understand that. How is confidence different than responsibility in this context? If I think the stuff's under my control because I've got a high personal responsibility, aren't I kind of by definition confident in my outcomes at that point? Or not necessarily?

Sarah: Not necessarily. So we do see some differences. Our confidence measure, and again we measure it looking at behaviors and experiences, but it really ties more into kind of self-esteem and how you look at all of your decision-making and abilities, if you will, outside of decision-making as well. So it really has more to do with that component versus, I feel like I'm responsible or I feel like I'm in control of something. So we think that they go hand in hand, we see that they do, they do contribute differently to financial success, at least in the research that we've done. So again, confidence is more of that self-esteem piece related to finances. I guess, just as an anecdote, in our journey to create this business, we've come across some advisors and have heard anecdotally from advisors that they, very few, but, "I want a client that's not confident, because then I can tell them what to do all the time," and I'm like, that is not an advisor I necessarily would want to work with. But again, they are a little bit different. So I can feel responsible for what's happening, but I might not feel empowered or I might not feel very capable. So that's kind of, I guess, the comparison there.

How Advisors Can Use Coaching To Rise Above The Obsession With Robo Advisors [27:47]

Michael: Well, and this reminds me a lot of the research and the theory around behavior change overall, which is that, if we're going to be capable of changing behavior, not only do we need to know what to do and how to do it, but we actually have to have the self-confidence and the internal locus of control that we believe we can change our own behavior. Otherwise we just kind of give up and we never actually try even when we're coached on what to do.

Sarah: Right, and I think that also speaks to...I know you had a great piece on behavior change and sort of the impact of the advisor in that role, so that direct relationship. I think that's where coaching really comes into play, and having a relationship can really help in those areas, versus, "I have an app that's going to remind me to," I don't know what. But it's a different situation.

Michael: Right. If my Fit Bit nudges me every now and then that I need to exercise, but if I just don't feel it, I just turn it off, and turn the notification off, and then I don't feel bad anymore. But if I've got a workout buddy that I'm supposed to meet for a jog at 7:00 tomorrow morning, I don't want to be the dude that doesn't show up at 7:00 a.m. and makes him run alone, because he's going to be really angry, and he doesn't want to be that person that would make me angry to be alone. So we both show up even though neither of us may have done it on our own, just because of the social accountability. I can't turn off an agreement with another person the way that I can just tell the technology to stop bothering me if I don't feel like dealing with it. So are those all the core behaviors, the core measurements that you found? Or are there others as well?

Sarah: I think the other piece is generally the time and the effort spent planning. So from how much effort and what kind of planning behaviors, are you a goal setter, those kinds of things we measure as well. So that's also a component. We have a few other things, again. We've spent the last eight years or so researching this in depth, and there are a lot of other areas to explore, and I feel like, again, financial planning is sort of an academic field. It's relatively new compared to industrial psychology, for example.

Michael: Yes, we're very new to the world of academia, I think. Again, that's why we say things like, "We're primarily in the business of helping clients change their behaviors," and the academic nerd in me is like, "Oh, really? So which behaviors precisely do you try to change and what's your theory of change for how you impact your clients in those ways?" And I don't know that I know any advisor that could answer that. It's not to be snarky, it's just, we sort of do it and deal with it and live with it, but there's no cohesive framework around, like what exactly are we trying to do? Which needles are we trying to move? Or even just recognizing which things can we actually impact and which can we not? I think we often experience that in practice, that we kind of colloquially call them bad clients. There are just certain people, I just keep giving them the advice and they just keep not doing it and self-destructing. And at some point I just throw my hands up in the air, that I wish I could help them, but I can't. But we don't really have any other labels for why it's not working aside from, I keep giving them the advice and they keep not doing it and self-destructing, and I throw up my hands in the air and move on from them. It's never really entirely clear what we're trying to work towards aside from, "I'm trying to tell them what to do and they're not doing it."

Sarah: Right, so part of the work, we work closely with Dr. John Grable at the University of Georgia, which I think I've mentioned to you before, but part of the research that we embarked on, and I actually started this several years ago, but was looking at that household financial manager as a job. And we've taken a lot of the methodologies from industrial psychology to pinpoint what are the key things, what are the most critical things that someone that's in that role has to do to be successful. Then what's the model, the competency model? We had a slide last year at XYPN where we showed sort of this model of all the characteristics and behavioral patterns that could impact financial management. And that's definitely something that at least we're working on. We have a working paper we're submitting to the CFP academic colloquium on kind of the critical tasks of household financial managers. What are the things they have to do? How does it compare to all the other stuff you're telling them to do? That kind of thing. So we're sort of working in that field, if you will, and pushing forward there. So it's been really cool.

How DataPoints Converts Wealth-Building Research Into Assessment Tools [32:47]

Michael: Okay, so I get this series of traits that tend to be wealth-building. Do I take personal responsibility, do I have confidence, am I good at focus, am I socially indifferent so that I don't keep messing myself up trying to keep up with the Joneses? So from your perspective, the point of DataPoints, no pun intended, is that you've actually taken these different factors and actually built them into an assessment tool?

Sarah: Right, so we have created a way, again, to assess those behaviors in individuals or in clients, in order for the client, most importantly, but the advisor as well, to have a clear picture of where they stand relative to others, and then provide recommendations for how to improve in those areas. And we also have a way for advisors to monitor that progress. It's self-report. So we're still relatively new and young. So it's not linked into Mint.

Michael: You're not grading us on our performance. You're just giving us a way to track our own results.

Sarah: Right. We're not linked into Facebook. We don't know how long you've spent on Facebook and can't measure that. The idea is, let's check in relatively frequently with our clients, remind them of what we talked about, remind them of the recommendations we gave them, and that they agreed to do with us. And then let's track that over time, and if it's working and they seem to be improving, maybe make those recommendations more challenging so that they're consistently building those behaviors over time.

Michael: So how does this assessment actually work? I'm assuming it's basically just a series of questions, like things that poke at how confident I am and things that poke at whether my locus of control is internal, external, and things like that. I go through a series of questions, and then you'll score me on all these different dimensions?

Sarah: Exactly. So like I mentioned earlier, we use this methodology that's called biodata that's been around for a long time. Again, it's one of the better predictors of how well someone will do in the future, on the job as well, just like conscientiousness by itself. And we ask a series of questions related to how others view you, what you do in certain situations, how you view yourself, and some of them seem straightforward. So we do get that comment, I guess, from advisors, like, "I know what to do in this situation. Of course I'm going to say I strongly agree, or of course I plan for my family's financial future," or what have you. But you guys are experts. You're experts in your field, and you know what it takes to build wealth. And again, we have research to back up these, these questions work and we score them in a way for many of them that's not necessarily intuitive, but yeah, that's the gist. So the client would take an assessment and the advisor receives a really comprehensive report, and the client does as well, and then they can create a way for them to recommend things, like especially if they're low on something, for them to do and work on over time.

Michael: And you find, as clients take this, they don't succumb to a social desirability bias? That whole, well of course I want to say I'm good at all this stuff. Like, "Are you confident?" Yeah, of course I am. Someone's grading me, of course I'm going to answer yes.

Sarah: Right, so the way that we get around that, just like any good test development process, is to again assess multiple areas related to a specific factor. So I might be able to or I might feel like I can inflate my scores on some of these questions, but I'm not going to do that consistently, usually, over time. That's always a gamble with psychometrics, right? There's always going to be individuals that feel compelled to answer a certain way, but yeah.

Michael: For anybody who's ever wondered why is it when you take some assessment tools like this and sometimes you feel like the questions ask you sort of the same thing two or three different ways, this is why, because they're trying to actually measure whether you're answering consistently, because sometimes if you're trying to game the system, you kind of forget and you don't always game it every time, and that's how they catch it to figure out that you might not be answering accurately.

Sarah: Yeah. It's a big red flag if you're contemplating an assessment that has 12 questions and 12 different scales, and it says...That's a red flag. There's a lot that goes behind the reliability and validity of a test.

Michael: Yeah, this is why even risk tolerance questionnaires need to have a couple questions there-

Sarah: Absolutely.

Michael: So you can get through them. And that just measures one thing. That's usually just trying to measure tolerance. So given that, how long is the assessment that a client actually goes through to get scored up on all these different areas?

Sarah: Right, so we have different assessments for different needs, if you will. So the building wealth test is really designed for individuals that are new to financial management, or for example, who've had a life change and all of a sudden they're responsible for their household's financial management.

Michael: Okay, so the recent, recent widow kinds of things. Like I was not the financial household manager, and now I am.

Sarah: So what am I going to do?

Michael: Let's get a sense of whether you're kind of naturally wired this way or not.

Sarah: Yeah. Let me back up and answer your question, too. So each of the assessments has about 45-50 questions. So it takes about 12-15 minutes on average for someone to complete.

Michael: I feel like 45-50 questions is a lot, but 12-15 minutes. These are not hard. It takes you 20 seconds per question or something.

Sarah: Right, you're not doing math problems.

Michael: Just kind of read a question, are you really confident, one to five? I'm sure they're a little more complex than that, but are you really confident, I can check one to five, and then I move on to the next question.

Sarah: Exactly, yeah. They're not doing algebra or compound interest or anything like that. But yeah, exactly. So each assessment is a little bit different. We also have an attitudinal assessment, which is a whole different, probably a topic for a whole different podcast, but it really deals with financial attitudes. So how do I feel? Not behavior necessarily, but how do I feel about things like budgeting and spending, and that sort of thing. That tends to be more appropriate for a broader range of clients. So even somebody that has been, you know, doing this for a long time, someone that's high or ultra-high net worth, for example, understanding their attitudes about investing, are they are short term or long term investor, are they really focused on status, or is that something that's not really important to them. Understanding those kinds of things are important as well, and then our final assessment that we offer today is the investor profile, which has that composure piece in it as well.

Michael: So there's an investor profile, there's an attitudinal assessment, and there's the building wealth test?

Sarah: Yeah, exactly.

Michael: Okay, so help me understand or just think through how I use this, or I guess even just where I use it. So I'm thinking about, I feel like building wealth test is the most straightforward. So I'm taking on a client, I sort of get it. It would be helpful to know their personal responsibility, their confidence, and particularly things like frugality and social indifference just so I can basically understand whether this is likely to be a problem client or not. I can almost imagine, if it's a younger client, I might even do this just to figure out basically, is this going to be a good long-term client for me from the advisor's end, or someone that, even if they're a high income, is basically never going to accumulate wealth because they score horribly on all these factors. So there's a version of this that, I guess, is basically like a screening tool to help understand is this a good client for me, particularly if they don't have wealth yet but in theory are going to build it with me.

And I guess there's a second application, which is just, after you agree to become a client, I can say, "Here's a tool that we use to try to get to know our clients a little bit better that we'd like to have you go through and we're going to talk about the results and I can put them through this assessment," just so I've got some context around, all right, where is this person strong and where are they weak? Like where are the areas I know I'm going to have to give them some nudges? Like they've got great responsibility and they're good at planning and confidence, but they are also not good on the social indifference. They're good at planning, but they also love keeping up with their neighbors. So that will be their tension that we're going to have to work with.

Sarah: Right. So I think in terms of where the assessments are used, definitely with building wealth we've seen the advisors that are using that particular assessment are really using it in that we've agreed to work together and now take this assessment, and let's figure out how we can work together on these areas, depending on what they're high and low on. Funny enough, originally when I started down this path, I had really thought of this kind of like what you were saying, almost like a screening tool. But really to help advisors take a chance on a client, like you were saying, that maybe doesn't, if they have minimums, maybe doesn't meet the minimum yet, but exhibits behaviors that they're going to be doing great in the future. So maybe this is someone that you can bring on.

Michael: There's a label in our industry, I don't actually love it, but it's going after the HNERY's, H-E-N-R-Y, high earner, not rich yet, which I find kind of offensive, because frankly it just views every young person as, like, every person is either rich enough to be my client or you're not rich enough yet, but you'll get there, kind of aggravates me. But I mean there's certainly a dynamic, and we see this for folks that we work with over time, and you can have young professionals that are in very healthy earning careers, and some of them just accumulate wealth like a rocket ship. They live moderately and they're banking huge dollars, and they quickly assemble a $1 million nest egg very quickly. And then others like, you know, I've still seen more than one doctor that earns $300,000-400,000 a year, and lives paycheck to paycheck.

Sarah: Right, so the doctor piece was always the one. You know, doctors were always fodder for, not last, but certainly they have that reputation, and you're absolutely right. I think they come out, or really anyone. Think about when you had your first job, and I think about it, too. It's like, oh my gosh, they're paying me to do this. I'm really excited. Let me go celebrate. That can be, you know, especially with a high income, it's like, okay, well I need to drive this kind of car, and of course we have to go ahead and live in this neighborhood, and they're spending in anticipation of being wealthy, and that can definitely trip them up.

Michael: And so for the HENRY, where you're trying to figure out if it's actually a good if it's actually a good potential long-term accumulator client for you, giving them an assessment like building wealth up front may actually be a pretty good way to do it, with I guess the caveat that you really want to give it to them up front because it's kind of awkward if you say you're going to work with them and then you give them an assessment and you're like, "Actually I really don't want to work with you now that you've gone through this." So I've got to maybe use a little bit more as a screening tool, "Hey, this is something that we use with potential clients to evaluate whether they're a good fit for us. So I'd like to give you this questionnaire, and at worst you'll learn something interesting about yourself, and at best we'll find out that we're a good match to work together."

Sarah: Definitely. I will say, with that one little caveat, which is, it doesn't measure the, you know, we don't measure agreeableness and we don't measure loyalty and we don't measure things that also impact the client relationship with the advisor.

Michael: So they may be good at accumulating wealth with you, but they could still be highly unpleasant people.

Sarah: Right, and the opposite, of course, is true, which is they might need a lot of help in terms of coaching their behaviors, but they're just a great client, they're kind, they're easy to work with, they listen, generally, to you. So it measures some things, but it can't measure everything.

Michael: Sure, so maybe we'll say it will help measure the business potential of the client, not necessarily the actual desire to work with the client.

Sarah: Right. It doesn't necessarily, exactly. And that particular assessment doesn't have the composure factor, again, can indicate or be a real red flag if that's something that, if you don't want to answer the phone 1,000 times in 2018.

Michael: So like how does the software or tool actually work? Like I email a link to my clients? I hand them an iPad in my office, "Here's the little test tool"? Do I embed this on my website? Dear prospect, check this out if you want to learn more about yourself. How do these come together?

Sarah: Yeah, so the main test that we talked about of the three, the longer comprehensive assessments, are designed to be sent to your clients. So we strongly recommend, and the research supports having clients take assessments like ours, but others as well, including risk tolerance assessments, on their own.

Michael: So don't do it in my office.

Sarah: Right, where you're sitting there, you're standing there or you're sitting there, and they're like, "Do I answer it this way or do I answer it that way?"

Michael: If you were every worried that they might not answer truthfully and just try to answer it to be pleasing to you, there's nothing like sitting across from them staring at them while they answer, just to push that point across to them.

Sarah: Exactly. And the demand characteristics kick in, and it's like, "Well, what does he expect me to say?" and that kind of thing.

Michael: That's a good point, because frankly, I say that sort of joking here, but a lot of us do risk tolerance questionnaires with clients right there in the office. That's actually pretty common. So I guess we should be cognizant that that may be a problem. You know, our process, we adopted FinaMetrica a couple of years ago, which similarly, is a 25-question questionnaire. And so when we actually did that, we started sending it to clients in advance of the meeting where we usually talk about investment issues, just because, frankly I guess, it was long enough, it was just conducive from a workflow and client experience process to have them do it ahead of time and we'd just talk about the results in the meetings instead of having them do it right there in the meeting. But I guess we kind of lucked into what was also a good process from just getting better answers from our clients.

Sarah: Yes, and FinaMetrica, they do a fantastic job, just going back talking about psychometrics, of-

Michael: Yeah, that's why we used them.

Sarah: Exactly. They outline very clearly how they created their assessment. But yes, I think even research that, some of the research related to risk tolerance questionnaires supports the concept of having them take it on their own. So yeah, you fell into the right way. That's good.

Michael: Every now and then it works out that way. So I can kind of set up my client and say, here's Jimmy's email address, and I email it out to Jimmy, and I say, "Can you please take this assessment tool?" and they go through and, I guess once Jimmy finishes, copy of the results gets sent to him, copy of the results gets sent to me as the advisor, and then I can follow up to say, "All right, now let's sit down and talk about the results of your building wealth assessment"?

Sarah: Yes, so you can do that, or we have two kind of different ways that advisors have been using us. And this was a couple of recommendations from some of our advisors that are XY planners, which was, they wanted their clients to receive just a quick snapshot of their results. And I just sat through this 10 or 15 minute assessment, I need something in return for my time.

Michael: Right, yeah. You've got to give them something on the spot, or they're just kind of dissatisfied about the time they just spent.

Sarah: Exactly, but advisors really preferred having the opportunity to sort of digest those results before they had a conversation, versus giving the client this big report that talks about all these things, and the client being like, "What is this?" They really preferred to walk through those results with their clients and really digest them.

Michael: Okay, so I need to give them something so that they get, the human being must get some immediate gratification at the end of his 10-15 minute questionnaire thing, but I don't want to dump everything on them, particularly if maybe some of the results aren't good. I'd rather deliver that in person and have that conversation.

Sarah: Exactly. And then there's a PDF version for the client and there's a PDF version for the advisor as well that has a little more information on how to interpret the results and all that good stuff. So that's definitely the process. So yeah, that's definitely the process, and for building wealth, then the next step would be to work with that client to say, well, if the advisor wants to do this and the client's open to it, "What are the areas we want to work on together? Let's pick a couple and find recommendations that can help you improve in these areas."

Using Performance Management As A Model [50:53]

Michael: So I feel like this is an interesting spot to me. So on the one hand, we all talk about how we try to help our clients through these behaviors, and it's pretty straightforward to play this out in your head. Clients who are bad at social indifference are going to have lots of keeping up with the Joneses questions, and clients who aren't frugal, we're always going to be talking about their spending. And clients who have poor views around personal responsibility, it's going to be a pain in the butt just to get them to take responsibility for their actions. So I get it in identifying who's got problem areas, but I'm curious even for your views with the background as a psychologist, how well positioned are we as advisors to actually help clients with these kinds of behaviors? We talk about ourselves as advisors to help with behavior. Where is the line between when I'm practicing as an advisor and when I'm basically practicing as a psychologist? Particularly since psychologists actually get a whole lot of training on how to coach people through behaviors, and we don't.

Sarah: Right. So that's a great point. What we've tried to do is, first of all, make the recommendations and reporting very straightforward. So we're not talking about abnormal personality for example, or clinical assessments. We're not talking about-

Michael: None of this stuff's in the DSM that we're looking up and providing official-

Sarah: No, no, no. I know, people often ask am I a clinical psychologist, and no. I didn't grow up in that world. Industrial psychology is more focused on normal, if you will, personality characteristics and assessments, and things like that. We say normal. What's normal?

Michael: The wonderful range of normal human begins with the normal dysfunctions that normal people have. Yes.

Sarah: Right. So we try to make it straightforward. Again, we provide some recommendations in the system and the platform itself that advisors can choose from, but they're not anything, you know, we do try to make them kind of smart goals, if you will, or recommendations. They're not really anything that's too terribly different from a manager or an executive that's trying to coach individuals below them in an organization and using performance management. We've really tried to use that as the model, because we do know that we don't want to get into issues related to hoarding and spending and things, you know, again, clinical type issues.

Michael: Right. There's a level of hardcore dysfunction that, like this is truly beyond my advisor paygrade.

Sarah: Yeah. And we know that we need to provide additional limitations around what you should and shouldn't do related to some of these areas. It's also designed, you know, eventually we'll be rolling this out later this year, where there's a client portal where they can actually create their own plan. So imagine, okay, what are the things I need to work on to improve here, that I think I can actually do? So again, what we're hoping is we're just giving the tools that allow the advisor to have that conversation and that they're straightforward enough that they don't feel like they have to have a clinical degree to talk about those things.

Michael: And you said you kind of view this as a performance measurement, like a performance assessment over time. So is the idea that if advisors, if I'm doing this with my, if I've got an ongoing client, I don't just give this to them when I start working with them, I give this to them repeatedly over time?

Sarah: Well, so we don't actually give the full assessment repeatedly over time. We believe we've built a really reliable and valid tool. So it's not something that you would need to reassess with. Instead what we recommend is checking in on the specific behaviors that you and your client agree to. So if we've said, for example, under planning that you're going to spend 30 minutes of time each week monitoring what's going on in your financial accounts, check in with them about that. So then they would just rate that particular piece, versus taking this big, long assessment again. What we're trying to do is see behavioral change in specific areas. So it doesn't require taking a huge assessment again. It's really asking you, did you do this, and how are you feeling about how you're doing related to social indifference? Are you checking Facebook every five minutes? That kind of thing.

Michael: Okay, so a handful of questions in each area. This is like a 10 or 15 question reassessment kind of tool or something?

Sarah: Well, it really just depends on how many factors you want your client to work on. We would recommend starting small. So one or two areas might be the best choice. So if they're low on frugality, for example, recommending two or three things that they can do over the course of the next several months to work on, and then checking in with them periodically to see how they're doing on those things. It would be really overwhelming to receive back recommendations, you know, in all six areas for example, with that test. I wouldn't stick with it. I don't know what that says about me, but-

Michael: Yeah, and that's why I was asking or wondering. But I guess it makes sense. My client already scored well on confidence. We don't need to keep doing the confidence thing. They already scored well. We know this isn't a problem area. We don't need to keep reassessing that. Okay, and so if I'm going to do that, then I guess that's also part of the software system, that I can queue up these reassessment questionnaires to go out to clients as well?

Sarah: Yes. So you can either automatically do that. We have the option to check in with them every day, but you might drive that client away. So you can pick the timeframe, and they're just automatically sent an email that, you know, again, it just a few areas to rate, and then before you meet with them you can also send them, you know, you can do it through the system as well. Just pick whenever you want to do it.

Michael: So is there a way even automated directly off my website? Like I'm just imagining, for existing clients, I get it, I know who they are, I can enter their stuff in and queue it up. But if I'm trying to do this with prospects, particularly if it's more of the screening tool angle things, if I have to manually queue it up every time, it sort of slows down how many people I can give this to?

Sarah: Yeah, so that's one of the, I guess, requests from most of our advisors that we're working with, and it's on our product calendar to make that component part of, for example, a client portal or something where they can start that process themselves.

Michael: Make it like a marketing widget. The same way that we have tools, like Risk Allies has a widget you can just embed on your website, and people come and they go through the questionnaire process, and then they can express to you that they're interested when they get to the end. So you're working on some similar widget-ized version of DataPoints.

Sarah: Well, we do actually have the widget right now, but it's actually a short version, it's a very small assessment that's used, that advisors can use for lead generation. So those are separate assessments from the three that we've been talking about. But the idea behind that was to give advisors kind of a unique measurement. So we have spending behaviors and career fit and things like that that they can embed into their sites depending on what blog topic they're writing about or what their marketing campaign is. And then that actually generates a lead off their website for them, and then they can kind of put them into the process within our system for those longer assessments.

Sarah's Journey Into Studying Financial Behavior [58:54]

Michael: So I'm curious for further context on just your journey to coming to the point where you're making wealth assessment tools for financial advisors and running a technology company as a psychology major. We psychology majors go interesting places in our lives. So how did you come to this whole path of studying people's financial behaviors and wealth-building?

Sarah: Yeah, so it definitely was a journey. As we've talked about before, my father was a marketing research professor, and that's the first exposure I guess I had to what you might call psychometrics, but really at the time it was survey research. So I recall having on the dining room table big piles of these returned surveys and-

Michael: Oh, right, because a couple years ago we would be doing these with, like these were mailers, we mail them out to people, and they do the survey, and then you get them all back and someone's got to collate the results.

Sarah: Right, so this is the 80's or whatever. But I'm dating myself here. So I always had an interest in research in general, studied psychology at the University of Georgia, took a couple of honors clinics, if you will, within the clinical department, absolutely could not do that. That was not my gift, it was not clinical psychology. I definitely wanted to take home the tragedies and the concerns of others. I think that's a really, it's a gift that people have that can manage those things.

Michael: I hit the same crossroads. I was a psychology major, and by the time I got to the end, it was like, yeah, those people are a little nuts sometimes. I'm not sure I can work with that.

Sarah: Yeeha, it was really heartbreaking, too. So some of the stories that you would hear. My professor that I was working with in the clinical department said, "You should really check out, if you like statistics and you like math, check out the industrial psychology side of the house." So I started working with Garnett Stokes, who's now at the University of Missouri, and she is sort of the queen of biodata. I know it's like what does that mean, but she's kind of known in her field for that particular methodology, and started working with her, finished my Bachelor's and Master's and continued on with her for the PhD there. And really, again, industrial psychology is focused on psychology of the workplace. So how can we hire, assess, develop individuals within roles, how can we put together teams, how can we impact organizational culture, things like that. So that's the world I went into, and I went into personnel selection specifically. So what kinds of tools can we create to hire and assess folks? And I spent a long time working for a small technology company in Atlanta. That was my first real job out of graduate school. And it was called Qwiz, with a W, which is kind of funny.

Michael: Q-W-I-Z, Qwiz?

Sarah: Exactly. Yeah. I really cut my teeth and learned quite a bit about certainly technology, but also how to have a product focused company in this field. So this particular company had hundreds of assessments that they offered, and at the time, online testing was super new, to take a test over a computer. So I worked there, headed up their consulting arm, if you will, and worked in product management, had a lot of experience with the fact that they were backed by a VC company, got into learning about how that whole world worked as well. So we went through acquisitions and ultimately were bought by Corporate Executive Board, which now was bought by Gartner. So I kind of had that, I lived that a little bit for a while.

Michael: Okay, so you've actually gone down some of the tech company...Well, not entrepreneurial path, because I guess you joined as an employee, but you've seen a technology startup that grows and goes through the cycle.

Sarah: Exactly. But in 2009-ish I started kind of thinking there might be something else. We had kids and I was working part-time at that point, and started looking at my dad's research. So I had, for a long time, I wanted to make a name for myself instead of riding his coattails. Obviously "The Millionaire Next Door" was very well-known when I started working.

Michael: So that was his research, that was your father's research.

Sarah: Correct. Yeah. So that particular book hit the New York Times Bestseller list in 1996, which was the Olympics. I was, I think, a sophomore in college. So it was really exciting and interesting to me to watch that, but at the same time I'm like, I'll go do something else. But in 2009 he had sort of a health scare, and that really caused me to put the brakes on. What's here? He has all this data, he's been surveying individuals for years. Is there a way to create an assessment? I just had to start diving in. And ultimately what I found was that there were questions and items and research that could be used in assessments to actually help individuals understand their own behaviors and patterns of behaviors.

Michael: So it was literally a vision of, how do we translate what we learned in "The Millionaire Next Door" into an assessment tool so we can actually understand who is likely to be one of the millionaire next door types?

Sarah: Right, it's like, how can I, you know, I've read the book, I understand that, where am I on some of these things that matter? And then several years ago, or four or five years ago, I guess, I really started thinking about, how could I have a company around this? Could this be something that I could do? I think I dabbled in some consulting or tried to, and decided that I can do this myself. I can put together how this technology should look. I know how it should look in this particular field based on my knowledge of human resources assessments, which by the way, is not the same as how financial services uses them. That was a learning. So I was a little naïve, of course, but we made blueprints, we applied for a provisional patent, and kind of started through the motions of creating DataPoints. That's the journey up to the last couple of years.

Michael: So I'm just curious, just the leap that you made from being in a world where you were an employee for 10 years or so, to deciding to go start and found your own company. I'm curious, what does that mental shift look like?

Sarah: Well, I have to say that, and I think anyone I've ever worked for would tell you the same, I have this, not dislike for authority. I certainly was a good employee, I think, but I've always tried to push the envelope, and I think what I realized was in order to have balance between my family, between other priorities in my life, and between wanting to do something professionally, I needed to do this on my own, even with part-time opportunities. And in industrial psychology, luckily there are a lot of opportunities for men and women, but I really felt like I had to do something on my own. I needed to craft a company that could work for me and that I could be successful in. So that was sort of the realization, if you will.

Michael: So you had a path where you could go part time doing some industrial psychology work while you were trying to lay the groundwork for DataPoints?

Sarah: Well, I actually left in 2012, I believe. So I had a few years where my husband worked. So I did have that flexibility to sort of build the business and do the empirical research that was required to create the assessments as well. So that's really what the majority of the time was spent doing. So I did have that flexibility and certainly not everyone does. So that was part of it as well.

Michael: Is starting a technology company while a parent of children turning out to be the work-life balance part that you'd expected? I had to giggle a little when I heard the word "balance" come out there.

Sarah: Oh, that's so funny. Yeah. Balance in technology, what does that mean? Right. So yeah, we made the decision last year that my husband would leave his job and come on with kind of part-time DataPoints, part-time caregiver as well. So we've been able to do that. We obviously saved and are extremely frugal. When we talk about frugality, you know, we're very frugal, especially right now and in advance of that, in order to do that. So I do have a general counsel and a chief financial officer, even though we're super small, in my husband. But that's how we were able for me to be able to do some of the things that I've been doing.

Michael: And do you have a technology programming background? Or did you have to go raise capital and hire developers and build a whole team just to actually get the platform built?

Sarah: So we kind of had two iterations of the platform so far. The first one, you know, and we can get into this too, but we've had several folks kind of come and go, sort of be attracted by the idea of a startup, if you will, and want to work for equity and things like that. So we had sort of an initial platform built that we actually completely rebuilt over the last several months, and was released in February or March. But yes, we ultimately had to hire an external team. I have a technology advisor that I work with. It's a dear friend of mine that's built and sold apps. So I didn't have that particular side. Obviously I'm not a coder, even though we all think we missed our calling, right? But that part of it, I felt like I was good at the architecture side. So I don't know how to write code, but I know what it should do. So that's kind of where we landed.

Michael: All right, interesting. And have you had to go through the whole wonderful world of venture capital and raising capital as well? Or are you guys actually bootstrapping this as you build forward?

Sarah: Yeah, we are bootstrapping it. I will say it's funny, even this week at XYPN, at the conference, we were able to chat with some individuals that are bootstrapped, that are VC-backed or just newly VC-backed, and that's been really interesting. Right now we made the decision that that's not something we're looking for. So we are bootstrapped right now. Again, I mentioned sort of being a pain to work underneath. So the idea of having other people tell me what to do after I've spent all this time trying to kind of create something for myself and for my family is challenging. But at the same time, you can do a lot of good things with money. I mean, there's just no way around it. You can have some really slick technology when you have $2.5 million to spend on it.

Michael: Yeah. But I mean, I guess the flip side, at the end of the day, the value of the business and what you build is assessment tools that build on, I guess what now is almost 20-plus years of research of what your father started with "Millionaire Next Door," how you guys have extended it into your assessment tool, and I would imagine have gone even further down some of those lines than what the book covered originally. So I guess from your end, your technology challenges, how do we take this assessment tool and the processes around it, and just make it really easy to use and engage in with technology?

Sarah: Right, yeah. And I think from kind of a long-term strategy, we recognize, especially in this industry and especially with I guess what you would call our target market, or we call it our tribe. Seth Godin calls it tribes. But they're dealing with so many technologies that we recognize we have to be able to play nicely with all of those and integrate. So that's something we didn't anticipate, but we have really great people that are our clients and they are willing to tell us the good and bad news. So we know they're kind of shifting the way that we're developing what we're developing.

Michael: So that's now coming onto your roadmap is, "Oh, I guess we've got to integrate with a WealthBox or Redtail or other CRM because if the advisor's got the contact details there, they want to push the scores in there and they want to populate the questionnaire information from the email, the name in the CRM," and now you're working on those kinds of integrations.

Sarah: Yeah, so the second half of this year is focused on those things on the technology side while kind of on the content side we're creating new assessments based on some of the factors scales that we have for different purposes. So that's kind of two lines of development, if you will.

Michael: So where do you see it going from here? I mean when you look out three to five years from now, where are you hoping to see this grow?

Sarah: Well, I'm hoping to see that we are, I guess, considered the source for that behavioral information and assessments and tracking. Certainly that would be my hope. I see us eventually integrating with some of the other tools that are actually measuring objective behaviors related to clients, too. So can we track how often they're checking different aspects, just in order to, again, help the advisor better serve their clients. Some of it's a little Big Brother. So that part of it is a little creepy, but-

Michael: There's an interesting dynamic to me, that like, again, we talk about how we try to help our clients with their financial behaviors, but basically the only way we can actually measure our impact and effectiveness as a financial advisor is whether their account goes up, or their aggregate wealth, their balance sheet goes up, because they're saving more than they're spending and not doing anything horrifically self-destructive. And I mean, it's a pretty lousy measurement tool at the end of the day. Even things like progress toward goals over a one-year timeframe, the biggest determination of your progress toward your goals is what the market does to your goal portfolio. It's not your...You know, at some point after you've saved a bunch and when you've got a $500,000 portfolio and you're still adding to it, the $300 a month savings behavior is really good, but the determinant of the outcome for the year is whether the market moves up or down, which I don't control. So measuring by dollars and wealth progress and even progress toward goals to me is sort of a proxy for what we hope good behaviors will eventually produce. But even on a year to year basis it's really noisy data, and I don't think it's satisfying to anyone to just say, "Just do these things. Trust me, it will be good in the long run." It may be true, but it's not very satisfying to keep paying your advisor for that privilege.

Sarah: Yeah. Right. I think, too, one of the things that ultimately we want to find ways to further validate the assessments that we have, but then also that there's actually been some impact. So I guess from our perspective, too, to the extent that we can assist in that research, because it does require a lot of academic research as well, to really look at the value, again, above and beyond what you can't control of that relationship. And maybe some of that is simply ratings of satisfaction and retention and recommendations to others and things like that. So there are some ways to measure outcomes, and again, they're not really exciting or sexy, but there are ways to do it that can add value to looking at the impact of the advisor.

Michael: In the world, it feels like there's more and more pressure on us to justify and explain our value. To me there's something really powerful to say, "Hey, we've been working together here," and I put up some chart for the client, and it's like, "Here's your real progress over the past three years together," and it's not a chart of how their wealth has changed, it's a chart that shows their financial literacy score is up seven points and their social indifference score has improved by three points, and their confidence score is up 17 points because we've done a lot of work together about getting them comfortable in their ability to succeed. You can show those kinds of metrics to say, "Here's how you prove that I've been successful as an advisor," because right now we don't have that. We don't have any way to show that kind of progress and impact for clients aside from saying, "Well, you weren't accumulating much wealth before, and now you're accumulating wealth. So that was me, I made that happen."

Sarah: Right, it was all me. Yes, I think, again, we have just started on that in terms of our technology, looking at, again, tracking how they're feeling over time and how they're rating themselves. So that is something that the advisor can chat with about and demonstrate back to their client. I think that over time we're hoping to refine that and make that even more compelling and powerful, too.

Michael: Yeah. It's a wide open area to me. I mean even just what you're doing with DataPoints itself. Most of us do risk tolerance questionnaires in some way, shape or form. Apparently most of us do it wrong because we have the clients do it in our office and we're not supposed to. But I had to learn at some point. So most of us at least have done something like risk tolerance questionnaires, but we have almost nothing else out there around how we actually assess and evaluate clients' behaviors, I mean never mind even getting to the second step, which is, are their behaviors and attitudes changing in a positive way because I've tried to do something to influence them positively. But even just to know when you're starting with a client, like here's basically the problem areas you can anticipate. This client has low confidence. So they're just not going to follow through on stuff because they're assuming it's all not going to work, or they're terrible in personal responsibility, or they're great on those, but their social indifference score is horrible and you're constantly going to be trying to get them to focus on their lives and not everybody else around them and what they posted on Facebook. Like just to know that and what those problem areas are going to be, to me, is a tremendous opportunity, never mind also to maybe screen some of the younger clients about whether this person's likely to be a good fit for wealth accumulation. So that's the goal, that's where you guys see it building over time?

Sarah: Definitely. We've started with the three assessments that we talked about. Our goal, too, is to release one that's more focused on high net worth, ultra-high net worth individuals. We have some advisors, as I mentioned earlier, that building wealth component is really geared towards individuals that are just starting out in financial management. And what we recognize is that individuals that, you know, are worth $10 million, they're not necessarily really interested in talking about frugality, and maybe it doesn't even make sense. So what kinds of behaviors...Or how can we frame that in a different way? Because again, like I said, what we know is that in general, conscientiousness will help build and maintain wealth over time. So what is it that we need to be talking about with those types of clients that will help them sustain that wealth long-term. So those are the kinds of things that we're working on as well.

Michael: So any advice from you for advisors that are out there thinking about going a similar direction with building technology? It's long been one of the interesting things to me in our advisor technology space, that a huge portion of our technology are what I call the home-growns, which I say affectionately. But it's basically advisor had problem, couldn't find solution, made problem for self with technology, realized other advisors might want it, sold it to other advisors, now owns software company on the side. I mean when you look at the history of our space, you know, Pro Tracker CRM went that path, Juncture CRM went that path, we had Sheryl Rowling on episode 34 talking about Total Rebalance Expert, which followed that same path. Orion Advisor Services was originally something that CLS built internally for themselves. So we have all these different technology solutions that have come up because advisors just see the gaps and then try to make something off to just fix it for themselves, and then start to turn into technology companies. So as someone who's seen your problem in the world and then tried to make some technology to serve the advisor community, any tips or thoughts of how to do that well or what not to do, that doesn't go well? Either way works.

Sarah: What not to do, right. Maybe we'll start there. Yeah, definitely. Again, I mentioned Seth Godin earlier. His Startup podcast, which is only 12 episodes, I think it was back in 2012 or 2013, he talks about his book, "Ship It," which is, get something out there and get the reactions of the market, versus sitting with it, keeping it behind closed doors, building up all this marketing and ideas sort of without figuring out if it's going to sell. I think just looking backwards, that was probably one of the bigger mistakes that we made, was thinking we had to have this huge platform built, when really all we needed to do was, let's test the assessment. Do people even care about these behaviors? I can do a WordPress plugin and determine that. That kind of thing.

Michael: So sort of that "perfection is the enemy of good" kind of thing?

Sarah: Exactly. Absolutely. So I think that's one of the things I learned along the way. Then I think really understanding and sitting with people and understanding how they're going to use it day by day, because even as an advisor you have your own methodology of how you do things and how you kind of work your workflow. I think having the tool, even if it's an MVP and it's clunky, and sitting with individuals, and maybe it's sitting virtually, but literally having them step by step seeing if they can put this into their workflow is enormously helpful. I definitely waited too long to do that with where we were in development.

Michael: Yeah, I'll admit I do a lot of consulting with fintech firms that work with advisors and a lot with companies that are coming in and trying to start with our space, and this is actually one of the biggest areas where I find friction crops up. They've created a thing or solved some problem, and it may be a really cool thing that they made, but when I think of just the process of how I work through with clients, I'm like, I don't know where I would do this or use this. I don't know how to fit it into what I do. Now, I get it for DataPoints and what you guys have built here. I get that there's a version where I've got a prospect that maybe I'm interested in but haven't decided to work with yet. So I'm going to say, "Hey, I'm going to send you this assessment just to see if we're a good match." I can envision the one where the client just came on board and said, "Hey, as we get to know each other better I'm going to give you this little assessment tool just so you can understand a little bit more about your attitudes around money, and we're going to talk about that a little bit." I get where I can fit those into the workflow, although it sounds like you've now lived the next level of that, which is, then we quickly get to, does it integrate with my CRM? And what can I automate?

Sarah: Right, does it integrate, does it integrate? I think that's a great point. It's also knowing that it's okay to not have everything yet. And I think that goes back to the first thing, which I said, which is, putting something out there and getting feedback and reactions is critical, and you can't be afraid. I guess the other thing is, just in terms of technology, really finding and working with people that you trust and know and that that's super important and that's one of the things that I think can be challenging. Because especially if you're not...I don't know what the code says, necessarily. I don't know what it does. I know where it lives, but if I-

Michael: I was going to ask, how did you even find your technology person or your development firm to actually do this and get someone to build it?

Sarah: Yeah, so we did end up, we had a recommendation for the kind of language that we should use. So we knew we needed to find an expert in that, and we ended up using like a freelancer site. We used Upwork and found this firm in the UK that we love, that we wish we could go over and see them and have a beer with them, and they've become essentially our outsourced IT along with, like I mentioned, we have a technology advisor here who's a good friend, and hopefully I'll coerce him into coming on board with us here.

Michael: At least now he can help look at a little bit of what they're doing and say, "Yeah, these people actually know what they're doing. You're okay."

Sarah: Right, exactly, and putting in processes for security and ensuring that, again, this is financial services, I'm not making a Pokémon app. This is something that's critical. So that's kind of our journey there.

Michael: So good old Upwork, yeah. We'll put a link to it in the show notes for people who don't know it. It's a giant platform for finding freelancers and outsourcers of all types. No relationship to our advisory industry. So you found programmers on Upwork. Cool.

Sarah: Yeah, copy writers, too. Again, if you have a good, think about a good screening process for those folks and put it into place. We've had a lot of luck with that, but those were the challenges. I would say the silver linings, is that the right way to use that phrase, have been finding or narrowing down kind of again who we think our product is for. That was a journey in itself, because I think when you look at financial services, again, coming as an outsider, not that it all looked the same, but there were lots of people calling themselves advisors, and what's the difference between...And my psychology friends still are asking me questions like, "Should I work with this kind of person or this kind of person?" It's been really interesting. So I think finding, for example, a group like XY or identifying who it is your target market is, is important, too, and building the tool for them versus for everyone. Nothing is going to be appropriate for everyone unless it's Google or whatever. I don't know.

Michael: Yeah. You need someone that's really serious about in-depth financial planning, just to want to take the time to go through this kind of assessment, much less reiterate on it or check in on it over time. You have to actually care about that stuff, and not all advisors do. Some, that's not their inclination. Some, it doesn't fit their business model. Very cool. As we come to the end here, this is a show about success and paths to success, and one of the things I've long observed is that success means different things to different people, sometimes even different things to us at different points in our lives. So as you're going down this path and getting traction with a startup technology company, as you look forward from here, what are you working towards? How do you define success?

Sarah: Yeah, we...When I say we I'm referring to my legal counsel and chief financial officer, but we as a family really are looking for something that's nontraditional in terms of how we work and how we balance our family. So we laugh, and I agree, it's kind of a laugh to say, "I'm going to have a technology company and have work-life balance." But we are looking for something like that. So I think success for us is to have a business that we're really proud of, where we can really do good work for the people that are our customers and our clients. But we're also able to balance that with our family and with other priorities in our lives. So that's not, again, going back to the funding piece, that's not really what somebody that's giving you $2.5 million wants to hear. But that works for our family. So success to us would be to have loyal clients that are making us better at what we do and that we're also able to balance that with a life that's not crazy. I don't know if life ever doesn't get crazy, but I'm hoping. That's success to me. So you asked for it. That's it.

Michael: All right, well I hope it gets to at least a slightly less crazy level.

Sarah: That's right.

Michael: Well, thank you so much for joining us. I hope we'll maybe contribute a little to that success path with some advisors that are interested. For everyone listening, this is episode 39. So if you go to Kitces.com/39, and scroll down a little on the page, we'll have the show notes which include some links out to what Sarah's working on and what DataPoints is working on if you want to go check it out and take a look. I have no financial interest in that or anything. I'm just genuinely fascinated with what DataPoints is working on. So I'm so thankful, Sarah, you were willing to join us today on the podcast and share a little.

Sarah: Absolutely. Thank you so much. This was great.

Michael: My pleasure. You take care.