Behavioral Finance

Advise Your Advisor On How To Advise You On Financial Advice

Advise Your Advisor On How To Advise You On Financial Advice

Your Advisor’s not telling you that your long-term financial goals may be out of sync with the level of risk you’re willing to take in order to reach them. No risk, no reward, right? It’s time to advise your advisor on how to advise you on financial advice.

According to a recent survey by asset manager Natixis, while about 73% of investors polled said that pursuing returns is more important, nearly 84% also said they would choose safety over risk.

So how can you balance increasing assets vs. tolerating risk? And how do you relate this to your advisor? For financial advisors, this balance presents a challenge as well. How your advisor is able to accurately assess this is by delving into your core natural risk propensity and tolerance, part of your financial personality.

The opportunity is to educate your advisor on realistic expectations and strategies to best reach your goals. And while he or she has the tools and training available to them in order to help you along, not everyone is onboard with matching your individual personality behaviors with your personal financial goals.

Where advisors often fall short is not identifying all of the risks associated with your particular situation: investment, financial, and personality risks. This is an important factor because under stress, you might not be as clearheaded or know all the ins and outs of a given situation in order to rationally process what’s happening and make behaviorally smart decisions. You very well may be operating based on your core natural behavior.

As you’re transitioning jobs, getting married, buying a house or preparing for retirement, you’re under a lot of financial stress – worries regarding accumulating wealth may push you into new, riskier investment decisions. Then add market volatility, unforeseen personal events or escalating college tuitions or long-term health care costs, or the emotions associated with being in the “withdrawal stage” rather than “accumulation phase”, and you’re pushed according to your core natural behavior. In many cases, this mix of stress and decisions based on your reaction to that stress is not beneficial for the long-term success of financial goals.

Your financial advisor needs to be in a position to manage not only your portfolio, but protect you from your natural self. This is an important step in the investor/advisor relationship and necessary to your financial success, because under stress, your risk behavior is less predictable without an objective tool. You may want to jump at every opportunity, or over-spend, or take no action at all. This is where knowing your behavioral insights and communication style, help your advisor help you and your significant other.

In many cases, a couples’ behavior will be directly opposite one another. So there is an added challenge for your advisor to know the behavior of each of you in order to address both in different ways.

So, how do you uncover these behavioral risks?

You need an objective, third party system so that your behavior, under stress, becomes more predictable and therefore can plan accordingly. Then, in combination with your experience and wisdom, discovering your financial natural behavior will allow you to become a behaviorally smart investor and provide valuable insights to your financial profile. It’s an enlightening process to see if your advisor is right for you, and then in turn, to see if you’re a match to them. And who knows? With these insights, you may find out a lot more about yourself and your partner, than you’d previously known.

Be sure to discover all of your risks originating from your natural core behavior. It’s the only way to protect you, from yourself. And it helps establish a trusting relationship with your advisor to create a financial plan that is as unique as you.

Find Your Financial Advisor Soul Mate Don't Settle for Less

Find Your Financial Advisor Soul Mate

People have unique financial needs; no two situations are ever exactly the same. Finding a financial advisor who really understands us and can deliver advice tailored to the specific situation can make a significant difference in helping us accomplish our life and financial goals.

It takes a special kind of person to be able to unlock deeply held information at the first meeting. It gets progressively more difficult if that first meeting is not conducive to our communication style. Fortunately, some advisors have Behavioral Finance tools available to ensure they are meeting your needs.

So many of us settle for second best when it comes to engaging a Financial Advisor. Yet how much more could be achieved, if the Financial Advisor we chose not only fully understood investments, but also knew how to uncover your goals and behavioral biases that may be a blockage to achieving those goals?

I wonder why we prolong a relationship with our Financial Advisor when it’s clear we are settling for second best. I want someone smart, trustworthy, and dependable and who cares about my future and my financial wellbeing by making sure they really understand me and are not giving me a generic portfolio that they prefer. Joanna Cleaver writing for US Money puts it like this.

You stay because breaking up is hard to do.

I want my Financial Advisor to see their self as a financial soul mate. I want them to understand I have a bias for Newness – giving more weight to something new and exciting, rather than because it made logical sense to do otherwise. I want them to partner with me as I manage my Mental Accounting bias – needing to allocate my finances into specific buckets for explicit purposes, rather than for long term goals.

Maybe this sounds radical, but why can’t I have a Financial Advisor who understands my communication style? I need time to understand and dwell on what they are saying. I need information delivered to me in a relaxed environment. Wouldn’t this achieve a greater likelihood that I would remain with the same Financial Advisor for years?

Many years ago, I wanted to invest in an exciting start up. Something about this entrepreneur and his ideas excited me. My financial advisor wouldn’t even discuss the opportunity referring to me as a ‘novice’ in terms of investing and to the entrepreneur as a ’7-day wonder’. The advisor had no idea about me, my plans for my life and indeed I think saw me as an amateur.

As I am reminded of that incident many years ago, I wonder if the advisor (long since out of my life) remembers the conversation as he watches the multi-billion dollar empire this young man went on to build.

All it would have taken for this story to have been different was an advisor who understood that I don’t take risks, but that I am very savvy when I see an opportunity, and that at that time I could well afford the amount I wished to invest.

Its time for Financial Advisors to approach us as our financial advisory soulmate. They need to take time to match us with advisors based upon communication style and understanding our behavioral biases. With a validated behavioral and communication process, I believe I can find my financial advisor soulmate. It isn’t just a need, but I believe it is their responsibility to ensure my financial and life goals are met.

It’s time for your advisor to learn more about Behavioral Biases that get in the way of making sound financial decisions and to use available tools and training to better support achieving life and financial goals

Do You Think About Your Investment Objectives Before Jumping in and out of Markets

Do You Think About Your Investment Objectives Before Jumping in and out of Markets?

Every so often I meet a personal investor who will tell me that now is the right time or the wrong time to invest, depending on whether the markets are going up or down as well as depending on that individual’s past experience.

Despite having 30 years of investment experience I never get into an argument with them because I know something they don’t. Namely, very, very experienced investment professionals rarely, if ever, out think the markets. Even the greats such as Warren Buffet and Anthony Bolton acknowledge that markets cannot be outguessed in the short term and their own success owes more to long term holdings rather than short term trading outlooks.

In any event, many people who are inexperienced in dealing with investment markets (and even some who are experienced) tend to look for signs that they are right in the perspective of what is happening at any point in time. They look for reassurance about what they are thinking, or more correctly hoping, can be confirmed by one or more public facts about the markets. In Behavioural Finance terms this is referred to as Confirmation Bias. Put simply, people favour information that confirms their beliefs or hypotheses even if such confirmations turn out later to be false indicators.

This behaviour is also closely linked with Herd Mentality. In essence, this is where people are influenced by their peers by adopting certain behaviours and follow trends as well as possibly purchasing items. Investment history is riddled with Herd Mentality events from Tulipmania in 1637 through to recent times when global property bubbles made many seem smart before looking extremely foolish.

Newness Bias is also a well documented behavioural trait and is the desire to give more weight to recent information and ideas usually to support a particular investment outlook. This helps to support the belief that one is right because the latest set of economic data says so. Does this sound familiar?

The use of these three outlooks on investing works both ways. If markets are going upwards, they are used to justify why one should invest. Similarly, if markets are going in the opposite direction they are likewise used as justification as to why one should not invest in particular assets. It just depends on your starting position.
So the question is, if one cannot outguess the markets what should you do?

Making Good Days out of Bad Market Days (2)

The starting point for all investing lies not in what markets are doing but rather in what you actually need in your own personal life. By defining what our own individual objectives are we can then set about expressing these in financial terms. Of course, such planning is not a simple process and requires a lot of thought but in my experience once this whole area is addressed properly investment decisions and their long-term effects become more realistic, as does the evaluation of competing investment options.

After that it comes down to long-term planning, and not short-term reactions to investment flavours of the month. The great thing about such an approach is it allows investors to exert control over their financial outlooks rather than being held hostage to them. In other words by controlling what we can control, namely our behaviour, we can have a disproportionate positive effect on our financial well-being. This isn’t just my view or any recent perspective. Considerable research has been done on this. As far back as 2000 Meir Statman, a distinguished economics professor based in Santa Clara University in California, produced research which showed that 93% of investor returns are influenced by their own personal decisions and not those of individual fund managers or indeed the performance of investment markets.

The bottom line? Before you make a decision to jump in and out of markets, think about what your investment objectives are and whether they are aligned to your, correct, asset allocation. If there is a mismatch then the issue isn’t markets but is more personal. And for that, you need to be aware of your own behavioural impulses as these influence your financial position more than anything else.

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Be-Fi for the DIYI (Behavioral Finance for the Do-It-Yourself Investor)

The oldest advice in the financial world: buy low, and sell high. And easy to follow too, right? Then how come we’re not all gazillionaires? That’s the Behavioral Finance $25,000 question.

First off, maybe a gazillion bucks isn’t everyone’s goal, but even moderate growth on savings over time in preparation for retirement shouldn’t mean we suffer losses over and over again along the way. So beyond market volatility, what are the factors for our repeated or short-sighted poor finance decisions?

Let me share a story.

Years ago I got a “hot stock tip” from a buddy, stop me if you’ve heard this one before. Between his recommendation and the historical value showing nothing but upward mobility, why not? Well, it hit. A solid 34% gain in just about a month. Amazing, right? I was so excited, I could barely wait to see what it would do next. And that’s the turning point. A couple of dips later, I still had a significant gain, but I was going to ride it all the way back up. It had to bounce back, right? That’s optimism bias. So to remove myself from further discouragement, I opted to not check it daily, even weekly. And in about the same amount of time of its rise to greatness, it dipped to pennies on the dollar below my initial buy-in. What happened? I got greedy? I didn’t set limits (gain or loss)? I got caught in the Herd-following bias. I was following the lead of the others instead of the hard facts, or following a set plan.

Well, I finally got around to telling my Financial Advisor. Even though she’s entrusted with my long-term savings plans, I’d not considered sharing my “fun experiment.” She took one look at the company’s performance and simply said “they’re awful, sell it while you still have something. And next time, check with me first”. Good advice, but not what I wanted to hear. So, I kept it anyway, even in light of overwhelming odds. That’s Overconfidence Bias.

It’s been almost 6 years of hanging onto to this one-time trading nightmare. At least, we weren’t “missing” the money, just sad to have seemingly blown the wad. On a positive note, I’m on the cusp of another big potential return. A rental house we bought at the bottom of the market and now, with a little elbow grease, is primed for resale. Bought, mind you, with our Financial Advisor’s full support. It’s our backup plan if we both lose our jobs and need to get out of our big, nice house quick. We could downsize finances in a hurry. Anyway, the silver lining, since I’ve held onto the dog of a stock, is to sell it when we sell the house and take the stock loss to offset the house profit. Not brain surgery, but in sync with our advisor’s input.

A nice story about Behavioral Bias and advisor communication, but let’s get back to the Financial Personality of a person who might seem to haphazardly buy high and sell low, when they meant to do otherwise, and how this affects long-term financial planning efforts.

Our Financial Personality covers both innate and learned behaviors in regards to our financial decisions. It also includes our behavioral biases, communication style, and Market Mood. So knowing one’s Financial Personality is the key to developing financial goals and then the plan to achieve them. This transparency in truly understanding ourselves helps us navigate volatile market events and stay on point for the greater good. Your Financial Advisor has assessment tools that can quantify your personality traits. There’s a self-guided version posted here (personal assessment) to try for yourself.

 

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Another integral part in working with your Financial Advisor, or any business colleague, friend neighbor or significant other, is communication. Recall that I included my advisor on the house purchase, but I only spoke with friends on the stock ordeal? Well, we all have our own communication style. And we tend to run in circles where our own style is fairly prevalent — learned from families and developed amongst friends. But in the business world, good communication is key to being understood, and understanding others. And we won’t always get to choose to (or from) whom we engage. So we have to learn to adapt (or be left behind). Wouldn’t you want a way to identify how you come across to others or how best for others to engage you? Well, there are assessment tools for this too. Again, here (communication style) is an assessment you can try, and even share with others.

It’s no coincidence that I included the interactions with my Financial Advisor as part of my financial thrill of victory and agony of defeat. She was and continues to be in my corner for staying on course and avoid making bad decisions when the terrain suddenly changes. And some mistakes have wholly been on my own. Now, this may not be the case for everyone, and that’s why we’re kicking off this discussion — to find the peaks and valleys of our financial journeys and help one another along the way. If you’re interested in seeking an advisor, or already have one, and want to share what’s being discussed here, please check out this advisor finder.

 

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Likewise, tune in for more Behavioral Finance for the DIY Investor over the next several weeks as we cover the many ways our Financial Personality, Behavioral Biases and Communication Styles affect, and are affected by, our relationships with our friends, family, Business and Financial Advisors.

Avoid Irrelevance- Reinvent Your Financial Practice

Avoid Irrelevance: Reinvent Your Financial Practice

Business school’s books and the internet are filled with examples of industries or companies that failed to heed the winds of change and now, they no longer exist. When my husband and I visited the Guinness beer factory in Dublin Ireland, I was intrigued by the story of the barrel makers (coopers) and how that was a thriving craft until cheaper?methods, and easier to use materials became available.

The most recent memorable example is the mortgage industry. It was booming before the Great Recession due to favorable lending terms and rates. When the financial crash came, many companies were on the brink of collapsing (Lehman did.) Individuals in the mortgage lending business also had to find ways to reinvent themselves.

Technology has already revolutionized other industries and careers (Uber, Amazon, Call Centers, etc.) How people adapted to those changes determined whether they remained relevant. The Financial Services industry is currently involved in a sea change due to technology (Robo platforms), potential legislation (DOL) and changing market demand (tech-savvy and Gen Y clients.)

Many people advocate focusing on a “Niche” and creating a “differentiating” value. Many of those ideas don’t really involve doing anything different, other than marketing and segmentation. Don’t get me wrong, those are good ideas, but they are just versions of what Advisors are already doing.

Fidelity’s Tech Guru Predicts FAs Will Become Life Counselors

Other people and companies are looking at Financial Advice with a different lens. What if you focused more on helping the client achieve their overall life goals and developing the finances needed to support those? What if you were able to assist in managing their emotional and behavioral biases that so often result in costly decisions? What if you became a Wealth Mentor?

Avoid Irrelevance Reinvent Your Financial Practice

Behavioral Biases are our natural, hard-wired reactions to events and situations (market volatility, family, etc.) We all have them, whether we want to admit it or not. As a Wealth Mentor, you can identify the client’s natural behavioral biases and help manage them before the client is triggered to make an emotional decision that will disrupt their Financial Plan needed to accomplish their goals. The best investment recommendations and financial plans are useless if the investor ignores that advice abandons the plan with the next “trigger.”

Cost of Ignoring Behavioral Biases
By Jay Mooreland, The Emotional Investor

Helping them stay on the plan to achieve their goals is the best value you can provide that will differentiate you from the rest of the pack.

Most Financial Advisors were attracted to managing investments and narrowly defined their service and revenue model along those lines. Not only is investment management becoming a commodity, but the whole Financial Advisor business model is being questioned. Many companies and people are eager to fill in the gaps. Merrill Move Upgrades Behavioral Finance.

How will you adapt?

Advisors Fooled By Own Biases

Advisors Fooled By Own Biases

Some advisors have told me that they will not use a tool because of a warped belief they can read people better. The fact is, we all have personal blind spots and behavioral biases which stem from the overuse of our strengths. The right assessment process built with scientific foundations provides a huge amount of objectivity, which can help an advisor not fall into the trap of being fooled by their perception and own natural biases.

However, criticism of traditional risk questionnaires is right, as Carl Richards points out in his blog. The typical risk questionnaire is not inherently accurate and is relied upon without properly engaging the client. But if used as a starting point, success can be achieved by the advisor using it to engage the client in -a goals-based planning process.

With a reliability factor of 91% (and having been completed by over 800,000 people,) the Financial DNA Discovery Process is an independently-validated, psychometric assessment used to measure a person’s complete financial personality (including risk). So while basic, situational “questionnaires” should be out, scientifically validated processes which are accurate and engaging should ALWAYS be used so long as they are part of a more in-depth conversation.