What are the financial behaviours which predict future wealth? Building on the findings of The Millionaire Next Door, Dr Sarah Stanley Fallaw runs DataPoints which provides behavioral science tools to enable advisors to impact client financial success
My guest in this episode is Dr Sarah Stanley Fallaw.
Sarah is the founder and President of DataPoints LLC, a company that provides scientifically validated, automated behavioral finance tools to the financial services industry.
DataPoints created the industry’s first biodata-based, predictive assessment of individual propensity to build wealth.
Sarah also serves as the Director of Research for the Affluent Market Institute, founded by Dr. Thomas J. Stanley. She is co-author of an upcoming book examining the behaviors and lifestyle of affluent Americans 20 years after the publication of The Millionaire Next Door.
Here’s my conversation with Dr Sarah Stanley Fallaw, founder and President of DataPoints, in episode 318 of Informed Choice Radio.
Martin: Welcome back to Informed Choice Radio. Sarah, I’m going to let you introduce yourself, if you don’t mind. You’re Founder and President of DataPoints. Tell us a bit about you and about your organisation and how it was formed.
Sarah: That’s great. Well, thanks for having me. Yep. DataPoints is a company that really is focused on helping individuals understand their characteristics in order for them to be able to be financially successful. We do that through behavioural science tools, so through assessments and different tools that allow you to understand yourself a little bit better. Our primary market though is with financial advisors, so here in the United States, but we also have some in the UK and South Africa and Australia as well. We really are, again, focused on helping individuals grow and be more successful over time.
Martin: In terms of how the organisation started, I know lots of the listeners to this show will be familiar with ‘The Millionaire Next Door’ book.
Martin: Which was your father’s book. Could you tell us a bit about that?
Sarah: Absolutely. Yep. I kind of grew up around this, if you will. My father spent really his entire life looking at the habits and lifestyles of individuals who became wealthy on their own, so self-made folks here in the U.S. primarily. His focus was really from a marketing perspective.
Sarah: He was a marketing professor for a long time and was really looking at it through that lens, through a demographic lens. What were the characteristics of self-made millionaires here in the U.S. My background is in industrial psychology, so I had a different viewpoint on what it took and the behaviours and underlying characteristics of individuals. I started working with him back around 2009 or so really with an eye towards writing a new book related to ‘The Millionaire Next Door’.
Sarah: So sort of a follow-up but also on my own company, which was DataPoints, trying to look at the predictive nature of some of these things that he’s found. That’s how it all blends together and a lot of the same things that we measure in the assessments that we provide are connected back to ‘The Millionaire Next Door’ and ‘The Millionaire Mind’ and other books that he wrote as well.
Martin: Could you take us back to ‘The Millionaire Next Door’? What were some of those main characteristics that were identified in terms of people who managed to build wealth and become wealthy individuals?
Sarah: Yeah, absolutely. I think there are a couple of key things. There are seven different kind of factors that he found, but some of the ones that stand out are frugality, certainly. Being frugal, living below your means. Not succumbing to what others are doing and driving and wearing is really important as well. That certainly stands the test of time. We see that today.
Sarah: The other pieces, allocating your time and energy towards building wealth, towards activities that either are helping you be better at your career or start a business or also just to plan and monitor what’s going on in your financial life. A lot of it has to do with being disciplined if you look at it from a higher level, but those are some of the factors that were included in that book.
Martin: Does that often surprise people when they hear that frugality, living below your means, and I guess not keeping up with the Joneses are both important characteristics? I guess when we think of wealthy individuals, millionaires, multimillionaires, we think of them as being quite flash with their money.
Martin: Enjoying the finer things in life, I guess. I know from my experience working with millionaire clients, they don’t tend to be like that. They do tend to be quite frugal. Is that a misconception we often hear?
Sarah: I think it is a misconception and I think it continues today. I think it takes something like a financial crisis for people to realise that maybe all of that flash is just that, not actually wealth. I think that the perception of what wealth is ebbs and flows depending on the economy too a little bit.
Sarah: I think, like I said, when there’s a downturn in the economy, people start realising that oh, maybe this frugal thing is actually something I should be a part of. So yes, I think that that is still surprising to people that it’s that consistent pattern of behaviours versus just being frugal for one season of your life.
Martin: Yeah, I guess frugality is a bit more attractive when everyone else is having to be frugal because the economy’s taken a bit of a dive.
Sarah: Exactly. That’s right.
Martin: You mentioned that DataPoints works as well as with financial advisors in the U.S. with people in the UK and South Africa. Those traits which are shared by wealthy people, are they consistent around the world or are they quite specific to the U.S. market?
Sarah: Yeah, that’s a great question. I think so to be fair, we haven’t done empirical research with those factors in other countries. What we do know is that generally that disciplined approach to building wealth is consistent regardless of who you are and where you came from, at least here in the U.S. That it may be different in terms of the cultural, some of the cultural factors that go into living in a different country, for example. Again, living below your means has a lot to do with math and luckily, that’s universal regardless of where we live.
Martin: In [inaudible 00:05:39] research, and we talked a moment ago about frugality as being a bit of a myth sometimes for people, but do you come across many other myths associated with wealth building?
Sarah: Yeah. I think that there still is a myth too that everyone that drives a late model car or that shops at Goodwill here in the U.S., which is like a thrift store, that those folks are going to be millionaires, too. I think the myths work on both sides. One side you have this glittering rich that if I have a BMW and I went to this certain school or college or university and live in a certain neighbourhood, that I’m wealthy. That may or may not be the case. Likewise, it’s the opposite. It’s not just those outward signs that can help you understand whether or not someone’s wealthy, but again, it goes back to just a consistent pattern of behaviours over time.
Martin: We hear quite a bit about having an abundance mindset. I guess if you are extremely frugal, you shop at the Goodwill store, the charity shops in the UK. Maybe you don’t have that money attracts money mindset and that could hold you back, too.
Sarah: Right. Exactly. I think it goes into hard work as well. My father always said as well that ‘The Millionaire Next Door’ book and a lot of his works really assumes that you have an average level of income. It’s not necessarily talking about someone that is at the poverty level and essentially is barely able to survive financially, although there are several cases like that certainly of people that have gotten out of that situation. Really he’s talking about individuals who have this average level of income and those that can take that income and transform that into wealth long-term.
Martin: Now I’m particularly fascinated with one of the concepts you cover, which is social indifference, and this negative correlation you found between using social media and net worth. Tell us, why are heavy users of social media typically poorer people?
Sarah: Yeah, that’s a great question. I think there’s a lot of different kind of theories about it. You could maybe say well, it’s just the fact that they’re so … they don’t have the discipline to not pay attention to it. I think it’s a little bit more than that. I think it’s that there is some kind of personality characteristic going along with that factor that impacts what you want to buy and how you want to signal to other people. If you see all of your neighbours, for example, going on a certain vacation, then all of a sudden it permeates your mind.
Sarah: You decide, well, maybe I need to do that as well even though it’s very much outside of my budget or something like that. I think there’s two kind of things going on. One is that discipline factor of not paying attention to it but then also just being able to ignore what others are doing. The reason that we see that correlation, I think that there are a lot of different reasons. I think primarily it’s because they’re confident enough in their financial plan and where they’re headed that they don’t have to worry about what others are doing.
Martin: I’m sure I saw some research recently around social media and in particular Instagram and how it presents a very, I guess a very jaded view of life. All you’re seeing is the best of other people. You’re never seeing the real gritty day-to-day life that people live. I guess that feeds into it, too.
Sarah: Absolutely. You think about it just from … I think about it related to raising children. The pictures that we see on Instagram or Facebook are often of beautiful birthday parties and when all of the kids are dressed up. Everything looks like it’s fantastic. What you don’t see is the 5:30 p.m. everyone’s crying, they’re hungry, you’re tired. Any semblance of normalcy in your house is faded away. You don’t see those pictures. I think it’s just the same with wealth. Exactly.
Martin: Now I’ve discussed on this podcast before the Vanguard Advisor Alpha study. It shows that good financial planners typically can add an average of 3% return to a client’s investment portfolio each year. I noticed you’d written a blog recently which describes how advisors can contribute a whopping 143% in capital addition each year. Could you talk us through that? I’m particularly interested in how I can get much better at what I do.
Sarah: Right. This really has to do with focusing on the importance of saving. We’re looking at it from the lens that if you don’t have enough to or if you’re not saving, then you don’t have anything to invest. What we were talking about in that blog really was related to this consistent pattern of behaviours. What we found is that individuals whether we’re talking about mass affluent or affluent individuals, those who have these really consistent patterns of behaviours tend to save more than their, if you will, low potential counterparts.
Sarah: Individuals that don’t have this consistent pattern of being frugal, of being confident, of really taking responsibility for their household’s finances. Again, the idea that if you could help individuals or you as an individual could change and build in these six areas that we talk about at DataPoints, that could add an additional or an incremental amount to your savings every year and to your base.
Martin: It’s really interesting because so often we’re told to focus on saving a few percentage points in investment charges or managing risk to make sure we get the best returns, but actually as you say, encouraging people to manage their income and expenditure so they can save more for the future is probably what makes the biggest difference.
Sarah: Right. There was another Vanguard study I believe that was just done. I may have that incorrect, but it demonstrated that even with all of the really great research that goes behind that Advisor’s Alpha and so forth, that really it comes down a lot of times to how much your clients are saving. I think that it’s not as exciting to talk about those savings and budgeting. They don’t make movies about that. They make movies about investing and what happens on Wall Street, at least here in the U.S., but it really is the basis for everything else.
Martin: Now by studying and understanding these behaviours or identifying in the work of a ‘Millionaire Next Door’ and subsequently with DataPoints, how do we actually go about applying them and making sure we consistently follow these characteristics?
Sarah: That’s a really good question. I think that we always recommend starting small because I think that if you’ve built a lifetime of certain habits, to change them all in one instance would be tremendously difficult. I think it’s first just being aware of how you are behaving related to your finances and taking a step back and either, again, working with someone or doing some self-assessment and understanding am I really being frugal?
Sarah: If I think about it, maybe I’m being more frugal than my neighbour, but my neighbour is out of control. It’s relative in a sense, but I think it’s first being aware and then tackling one piece at a time. That’s what we recommend at least to our advisors that they do with their clients.
Martin: So start slow, start small, and just build up those habits over time.
Sarah: Exactly because those habits were built in you over time. It took time to build that, those behaviours. Again, tackling them all at once would be a little overwhelming.
Martin: No, absolutely. Now what’s next for your research and what’s next for DataPoints? I see you’ve got a book coming out I think here in the UK in October, so tell us about that.
Sarah: Yep. Part of the work that I did with my father was, again, looking at these traits and these characteristics over time. That book will be coming out in October. Title is to be determined, but it really will be looking at the consistencies of some of these things over the past 20 years but also with an eye towards the changes that have occurred. Changes in technology, all the access that individuals have now to investing platforms and things like that as well as some of the rising costs in healthcare and education particularly here in the U.S.
Sarah: At DataPoints, we’ve been turning our attention a bit to investing, specifically. We’ve been and we just released an assessment that’s called the Investor Profile that really is designed to examine patterns of behaviours related to that investing, specifically. So not just financial management broadly, which is the looking at frugality and things like that, but instead looking at things like being composed and having confidence in your investment-related decision-making and those kinds of things. We’re trying to predict who’s a good investor. That’s what the assessment’s designed to do.
Martin: Sarah, it’s been great to chat. Maybe we can have you back on the podcast around October when the book’s out. We can talk more about the concepts in the book. Before you go, how can we find out more about your work and get in touch and connect with you?
Sarah: Yeah, absolutely. On DataPoints website. That’s datapoints.com or on Twitter, it’s @datapts.
Martin: Fab. We’ll make sure we put links in our show notes for this episode so our listeners can find that nice and easily. Sarah, thank you for your time.
Sarah: Thank you so much. It was great to be here.