Behavioral Marketing

De-Mystifying The Multi-Dimensional Nature of An Investor's Risk Profile

What Is The Misunderstanding Of An Investor’s Risk Profile?

In my journey as a wealth mentor over the last 20 years, and developing a rigorous scientifically based behavioral finance approach for the last 15, I have watched the risk profiling discussion seriously evolve from denigration to one that is being more intelligently embraced and applied. From advisors, clients, compliance departments, and regulators: what is the misunderstanding of an investor’s risk profile?

The problem is a combination of factors:

  1. Lack of clarity in the terminology as to what defines risk profile. For instance, interchanging risk tolerance, risk perception, and risk capacity although all have different meanings.
  2. Regulators worldwide have created principles based laws around risk profiling. But the legislative vagueness leaves too much open for interpretation leaving many firms doing virtually nothing.
  3. Compliance departments allowing “tick-the-box” methods of risk profiling along a broad array of approaches from doing nothing, to guessing, observing, or 3-to-5 hacked together questions.
  4. Applying the risk profile in a linear way based on a single measurement.
  5. Lack of understanding risk profiling at a deeper level because many of the instruments and processes are slapdash and poorly constructed. Even the better tools are one dimensional but are used to measure all aspects of risk, which is wrong and misleading.
  6. The Inability of advisors/consultants to integrate risk profiling and behavioral discovery into the client onboarding process.
  7. An unwillingness to have the client invest time in additional questionnaires viewed as distracting from getting on-boarded.
  8. The plethora of online investing platforms leveraging a quick & dirty approach to “knowing the investor” without any real insights.

The positive development now is that there is a heightened awareness of the need to adopt a more formalized behavioral discovery process, recognizing that risk taking, tolerance, and loss aversion are separate and measurable personality traits. And it’s a combination of all the risk factors, along with many cognitive biases, that interplay in how decisions are made.

Further, the compliance environment is requiring a strengthening in processes because the #1 issue on the agenda of regulators is dealing with the increase in investor complaints from a lack of suitability. Suitable solutions will never be able to be satisfactorily offered with demonstrated client buy-in unless EACH of the multi-dimensional elements that make up the risk profile is understood by both the advisor and the client.

For the last 15 years in my role as a wealth mentor, I have been guiding advisors and clients to understand the multi-dimensional nature of their risk profile as highlighted in the table below.

Risk elementsA risk profile is not a single number determined in a vacuum. In fact, it is a quantifiable number made up of many measurable financial and personality based elements. Whether you use the Financial DNA Discovery Process or other platform, I suggest you follow these key steps to identify and apply risk profiling:

  1. Use the client’s long-term risk profile for building a long-term portfolio and predicting how they will intrinsically make decisions over the long term (this is what Daniel Kahneman refers to as the Level 1 behavior). The correct questionnaire structure is absolutely critical to getting this result. In my terms, this is the hard-wired natural DNA Behavior. The questionnaire should be designed and independently validated based on sound psychometric principles.
  2. Understand the short-term risk profile based on current situational attitudes and how the client manages themselves (Kahneman’s Level 2 behavior). This is what many risk tolerance questionnaires seek to measure with varying degrees of quality and accuracy.
  3. Separate the various calculations of the Risk Need to achieve the client’s goals and Risk Capacity being their financial ability to sustain losses from the various personality traits associated with risk, risk propensity (desire to take risks), risk tolerance (emotional ability to live with losses), loss aversion (emotional reaction to markets), risk and product perception (reaction to situations and products ), and risk preferences (personal evaluation of preparedness to take risk in a given situation or with a product).
  4. Know each client’s Risk Composure – how they are feeling during up and down market movements. Some will embrace down markets and others will fear them. Of course, added to this is knowing how to communicate with clients during these different times.
  5. When wealth mentoring the client, help them set purpose based goals that are clearly defined for keeping them focused on what’s important. An IPS can be used as the guide-stick and for getting the client’s emotional buy-in.
  6. Finally, as an advisor, know the influence of your own risk profile and behavioral biases. Your mindset can inadvertently play out with the client whereby over time they eat your risk profile.

Here are other good resources that support the steps highlighted above:

1. OSC Study on Risk Profiling
2. Adopting a 2-dimensional risk tolerance assessment process
3. The sorry state of risk tolerance
4. How to measure risk tolerance

The Right White House Team

Balancing Trump’s Personality with the Right White House Team

Part 3 of 3 – It’s Somebody’s Circus With Somebody’s Monkeys

President-elect Donald Trump is determined to make America great again. To this end, he will take bold steps to deliver this promise. Balancing Trump’s Personality (Influencer DNA Behavioral Style) will require the right White House team that can cover his inherent blind-spots.

Donald Trump succeeded in winning the White House because intuitively he understands his personality and how to apply his pioneering, fast-paced, and risk-taking traits. Even if some aspects of how things get done or what he says are controversial, he understands how to use his expressive communication style to win people over.

However, Trump is likely to be pragmatic when it comes to selecting his White House team. He is driven by results, outcomes, and success and will surround himself with people who can deliver his vision. He has the ability to draw people together even if they were once an adversary, and will be able to quickly harness appropriate skills and talents to implement plans and ideas.

Donald Trump thrives on conversation and gains much of his knowledge, insight, and initiative through debate. Further, he understands the benefit of hearing other’s thoughts and opinions; for him, knowledge is power. The right White House team will need to consist firstly, of individuals who understand his enthusiasm, and secondly, be behaviorally smart regarding knowing how to manage their own and their president’s personality. Standing up to him will be hard, requiring confidence and courage.

In this team, there is only one place for a Trump personality, but those who have even opposite behaviors to Trump must be vigorous and able to add value to the White House team through balancing Trump’s personality and their own.

The ability to understand one another’s communication style is imperative to the success of the team. Each member will need insight into their behavior and communication style and know how to moderate their approach to build a team of confident people empowered to share their thoughts and ideas, in a mutually beneficial environment.

Donald Trump's White House Team
Donald Trump's White House Team

The Trump Team needs to provide balance to Trump’s personality. The green bars are Donald Trump’s personality traits measured by the Business DNA Discovery Process. The personality traits required to balance Trump are highlighted by the gaps in the summary below. He needs to hire behaviorally smart people who can fill these talent gaps.

Commanding: A consensus seeking, group orientated diplomatic person able to counter Trump’s authoritarian leadership style

People: A thinker, serious, quiet, able to listen/observe but with the confidence to point out potential issues/dangers.

Patience: A people-focused person, encourager, empathetic to others, skilled at accepting other’s differences & managing them.

Structure: A structured person, skilled at keeping others on track, focused, delivering results, keeping promises.

Trust: A person who will explain other points of view when trust is lacking. Confident to challenge micromanagement when others feel overly managed.

Pioneering: A person confident to say STOP when too much change is destroying reliable tried and tested, still relevant, processes.

Risk: A person strong enough to challenge or question high risk without shutting down innovation.

Creativity: A person excited by creativity but able to suggest balance and a more anchored approach

As for Trump’s current White House team appointments, without a formal, behaviorally smart process in place: “Is it a good way to pick a cabinet? Not especially,” says Reed Galen, who worked on several presidential campaigns and served the George W. Bush administration. “But Trump ran the worst technical campaign in modern history and is poised to become president, so what do any of us really know?”

To learn more, please speak with one of our DNA Behavior Specialists (LiveChat), email inquiries@dnabehavior.com, or visit DNA Behavior.

How Hillary Clinton Undermined Her Own Success

With(out) Her – How Hillary Clinton Undermined Her Own Success

Part 2 of 3 – Hill’s Lack Of Self-Awareness

Hillary Clinton must be wondering why she lost the election while being the favorite and front-runner for most of the campaign. How did this happen? Hillary must look inwards to who she is and see that she did not master the strengths and struggles of her natural, “hard-wired”, Strategist DNA Behavioral Style. These behavioral insights identify the primary drivers of her good (and bad) leadership decisions, financial dealings and general approach to life.

The truth is that sometimes it is hard, even for me, to recognize the Hillary Clinton that other people see
- Hillary Clinton

Hillary Clinton’s Strategist behavioral style has made her successful, but with blind-spots that were clearly not managed, and therefore, her downfall. How Hillary Clinton Undermined Her Own Success:

Hillary Clinton Insights
  • Skeptical, and not transparent with information
  • Questioning, guarded, wary, and controlling
  • Not a good listener
  • Unable to relationally connect to people and feel what they are feeling
  • Very self-reliant and operates based on her own thinking
  • Structured, but potentially too rigid with plans
  • Quite cautious and not prepared to take strategic risks

 
For a smart, politically seasoned woman it’s fair to say that Hillary Clinton got in the way of her own success. Hillary Clinton’s behavioral insights reflect that she could be seen as cold and unapproachable as well as untrustworthy and dishonest, and did not do enough to allay these opinions.

Her personality showed her to be aloof and less willing to make changes, yet had she understood how others saw her. She could have managed her reflective behavior more effectively.

Clinton’s need for information and analysis gave the impression she was more focused on numbers and following a structured plan than on voter’s needs. Having insight into other’s perceptions would have ensured that her messaging was warmer and more empathetic. Furthermore, she could have gone deeper into the heartland where Trump went and secured the support of the disenfranchised white voter.

One clear issue that showcases how Clinton got in the way of her own success was an arrogant belief that she was taking for granted the presidential win, simply because her message was clear and candid. But had she known that her ability to listen empathetically to the people was very low, she could have changed her messaging to be significantly more heartfelt and managed her lack of empathy.

There is no doubt Clinton has the ability to take charge. The question is, does she have the personality to bring others along with her? With a tendency to keep information to herself and to invest little or no time in building meaningful relationships, it’s fair to say that her leadership style would be aloof and non-inclusive, which would certainly alienate team members.

When you are seeking to engage others with your plans and agendas; when you need others to deliver goals and your vision, failing to understand that a personality that is reflective, task focused, and overly serious about facts & figures, yet highly competitive, can be viewed as distant, cold and unapproachable.

Further demonstration that Clinton got in the way of her own success is her tendency to prefer tried and tested solutions. At a time when the people were looking for a change from the status quo, she did not understand that her lack of creativity presented her as gray and boring.

Clinton v Trump – The Comparison

66/98 Clinton will make considered decisions; appearing to be hesitant, requiring more and more information which could appear to be procrastinating. Trump will make fast decisive decisions; sometimes getting it wrong but always moving forward.
96/73 Clinton follows the rules to get the results she needs. Trump will break down boundaries and not wait to anticipate outcomes
54/99 Clinton tends towards keeping things as they are; avoids moving away from tried and tested ways of proceeding. Trump is all about doing whatever possible in achieving goals
95/62 Clinton will stick to agreed direction and agendas to achieve goals, even if they are not working out. Trump will change direction mid-stream if a different plan brings success.
66/92 Clinton is stuck in the status quo. Trump is open to new ideas if it achieves his goals.
66/90 Clinton needs details, analysis, and research to make decisions. Trump is not into the details, just the results.
79/90 Clinton is less forthright with communicating, which might cause confusion in mixed messaging. Trump is clear and forthright in expressing and communicating.
79/96 Clinton is less comfortable with conflict. Trump is not fazed by conflict and a dirty campaign.
90/84 Clinton is motivated by personal interest without regard for others. Trump the same.
92/90 Clinton is disinterested in other’s problems.
90/92 Neither are empathetic towards issues others face.

Hillary Clinton is calm and controlled in her behavior; appearing remote and superior. Her inability to understand her personality, or have the behavioral insights to be able to manage it, so people could see the strengths and talents as a leader cost her – the White House.

To learn more, please speak with one of our DNA Behavior Specialists (LiveChat), email inquiries@dnabehavior.com, or visit DNA Behavior.

Donald Trump's Behavioral Insights

Donald Trump – Making Behavioral Insights Great Again

Part 1 of 3 – How well he knows himself!

Well, the Trumpster beat the odds and has jumped over everyone to win the Presidency. How did he do it? The answer is deeply rooted in Donald Trump’s behavioral insights – his natural, hard-wired Influencer DNA Behavioral Style. These personality insights identify the primary drivers of his good (and bad) leadership decisions, financial dealings and general approach to life.

I’m not running for office. I don’t have to be politically correct. I don’t have to be a nice person. Like I watch some of these weak-kneed politicians, it’s disgusting. I don’t have to be that way.
- Donald Trump

Donald Trump’s Influencer behavioral style has made him successful, but if not managed, could be his downfall. Overall he (is):

Donald Trump Influencer Insights
  • Driven by power and success
  • Very spontaneous and instinctive
  • Extremely creative and an out-of-the-box thinker
  • A take-charge, decisive and a fast-paced decision-maker
  • Works with people to get the results he wants
  • Could be unsympathetic to others needs
  • A strong communicator but lacks filters
  • Very confrontational and prepared to play tough
  • Into achieving economic and political goals. He could risk a lot and be too optimistic
  • Into trying new ways. Sometimes they win, and other times they fail.
  • Has a transactional mindset and could be too impatient when a program does not work out quickly

Donald Trump’s behavioral insights reflect that he is supremely cognizant of these behavioral abilities and uses each to further his personal agenda.

It is clear Trump knows his personality; he knows success is his lifetime goal. Anyone who has even limited behavioral awareness should have known that the election trail was all about the salesman’ getting the sale (the White House). But from here on we’ll see the negotiator because that’s how he knows he will get results. Trump will be a hard-nosed negotiator; whether putting together a White House team or negotiating trade deals on the world stage, he will be reluctant to give in on even the smallest points.

The old idiom my way or the highway will probably be the new White House mantra.
Trump won’t be fearful of taking risks, he will play the odds, some you win and some you lose, but as long as he is always moving forward to the goals and objectives he has set – he’ll feel he is on track.

As a decision maker, Donald Trump will not be readily swayed by sentiment or humanitarian impulses. This will be advantageous when it comes to balancing competing interests or bargaining with adversaries. He is likely to be a bold and ruthlessly aggressive decision maker showing little concern for the emotions of others.
That said – he knows how to keep people on board; he knows how to set others up for success in order to achieve his goals. The result is, a Trump that is equipped to be a strategic player in situations where achieving results is a priority and concentrate on matter-of-fact, practical issues.

Listening to those around him talking about his loyalty, great to work for, cares about me and my family, further demonstrates his ability to manage his personality. Confident, goal-setting people, such as Trump, excel by blending their strong drive to reach key goals with sound knowledge, high-quality processes and quality control standards.

With his outgoing and innovative nature, there is no doubt Trump is the Populist’s choice. Ultimately, he won from his preparedness in the rural areas where Hillary did not go. He won what should have been Democrat territory

Trump v Clinton – The Comparison

98/66 Trump makes fast decisions; sometimes getting it wrong but always moving forward. Clinton hesitates, wanting more information, with a propensity to procrastinate.
73/96 Trump breaks down boundaries and doesn’t wait to anticipate outcomes. Clinton is only interested in knowing the outcome of decisions she might make.
99/54 Trump is all about setting the bar as high as possible in achieving goals. Clinton tends towards keeping things as they are.
62/95 Trump changes direction mid-stream if a better plan is formulated to bring success. Clinton sticks to agreed and established direction and agendas to achieve goals even if they may not work out.
92/66 Trump is open to new ideas if it achieves his goals. Clinton is more stuck in the status quo.
90/66 Trump is not into details, he just wants results and will say what he wants to say even if possibly wrong; decides instinctively. Clinton needs details, analysis, and research in order to make decisions.
90/79 Trump is clear and forthright in expressing and communicating. Clinton is less so, which might cause confusion in mixed messaging.
96/79 Trump is not fazed by conflict. Clinton is less comfortable with conflict.
84/90 Trump is motivated by his own personal interest or advantage, especially without regard for others. Clinton, even more so.
90/92 Neither are empathetic towards issues others face.

To give Mr. President Elect the final word – “No dream is too big, no challenge is too great. America will no longer settle for anything less than the best.”

To learn more, please speak with one of our DNA Behavior Specialists (LiveChat), email inquiries@dnabehavior.com, or visit DNA Behavior.

Managing The Rise In Clients Non-Financial Issues

Pull Up The Couch For Your Next Financial Client

According to David Dubofsky, Ph.D., CFA, and Lyle Sussman, Ph.D. in their study, “The Changing Role of the Financial Planner Part 1: From Financial Analytics to Coaching and Life Planning”, approximately 25% percent of the financial advisor’s contact with clients is devoted to non-financial issues. About 74% percent of planners estimate that the amount of time they are spending on these issues has increased over the last five years. Source

There is mounting evidence to show that financial advisors indeed have to radically change their approach to the way they relate to investors.

Money has always been a ‘touchy’ ‘emotional’ subject. Whether discussions resolve around – making it, losing it, sharing it, incorrectly quoting about it i.e. “money is the root of all evil” when the correct quote is, “For the love of money is a root of all kinds of evil.” Timothy 6:10 – the topic can become toxic.

Pull Up The Couch For Your Next Financial Client image 1

Why then are we surprised (as I was) to find financial therapists popping up in our world? Or why do we think that financial advisors need to know all about our life and emotional state like a doctor? Is it unlike the mechanic that inquires about our driving habits as part of diagnosing a problem, or advising if those squeaky brakes need to be changed sooner than later? In that case, we’ve surrounded ourselves with all sorts of professionals and experts, acting as doctors and therapists to help us along in meeting our daily needs and lifelong goals.

Pull Up The Couch For Your Next Financial Client image 2

Source Photographer: Josh Dickinson

Well, it’s actually quite simple really: the majority of us have no idea what triggers we inherently have that govern the way we manage our finances. We would be alarmed to know we have inherent behavioral biases. We would cringe at the thought of having allowed the bankruptcy our grandparents suffered to dictate the ugliness with which we now accumulate and “store” our wealth.

But take heart these triggers can be revealed, they can be managed and we can work with our financial advisors to develop plans to create wealth that line up with our life goals and values.

In his book Behaviorally Smart Financial Planning: Behavioral Finance Made Practical for Advisors’ Hugh Massie makes the following comment, “Observations and traditional risk profiles don’t get below the surface where much about investor behavior is hidden. Financial advisors should know how to uncover what is happening as investors think through’ decisions.”

The truth is financial advisors need to know how to uncover what lies below the surface of our decision making. They need to know what historical events impact our view of creating/managing wealth. So yes, they do have to approach the advisor/investor relationship a bit differently today. But here’s the good news, they don’t have to spend 8 years or so studying to become a doctor.

The right tools and training for uncovering our core natural behavior is the key. For example, DNA Behavior International has a significant discovery platform called Financial DNA that reliably discovers all dimensions of an investor’s financial personality and inherent bias for making life and financial decisions. The discovery process is fast and accurate and places vital information in the hands of financial advisors before the first meeting with their investor clients.

Investors need an advisor who can guide them towards making informed decisions, one who speaks to them in a style that’s easily relatable while mitigating emotional, kneejerk responses. Emotion plays a significant role in so many parts of our lives that having an investor to coach us through the feelings and reactions, and keep decision making on the right track is necessary.

Pull Up The Couch For Your Next Financial Client image 3

Source

Financial advisors must understand their clients at a deeper level. It is essential to have a practical understanding of the psychology, emotions and biases that significantly influence investor’s imperfect decision-making patterns. Furthermore, advisors should understand how to recognize and manage their own biases when working with investors.

Ultimately, it is fair to say that the role of the financial advisor has changed, and will continue to do so. But there is no doubt that with a reputable and appropriate process, advisors can be well informed in advance of a first investor meeting.

Conversations around money will always be complex. While we talk more freely about other intimate subjects, when money enters the conversation, emotion, distorted stories, ego, and even fear enter right along with it.

In conclusion, if we understand our financial behavior then we can balance our emotions and beliefs. We will act more wisely with our money. Conversely, if we lack understanding and are confused about why we make certain decisions, then the decisions will be poor, creating financial chaos and discontent. Advisors need to be fully equipped and prepared to unravel investor’s complex issues around money. Investors need to be able to trust advisors in order to reveal information.

2

How Do I Get People to Listen to Me?

Do you understand the words that are coming out of my mouth?

1998 Rush Hour movie starring Jackie Chan and Chris Tucker

How many times have you been in a situation where you were trying to communicate with someone and it felt you might as well have been talking to the wall? I remember explaining a concept to a client using a PowerPoint and the client didn’t hear a word I said because he was focused on how he didn’t like the color scheme on the slide.

60% of communications fail because communication styles and preferences are not aligned. Based upon 1999 Stanford Research study.

Our brains are hard-wired to process information and learn a certain way. Most people accept this by now due to the volume of research on the topic. However, we can learn how to adapt to different communication styles to increase our effectiveness.

Sales increased 17% just by a salesperson mimicking the communication style of a potential customer. Harvard Business Review

Our research has identified that most people have one of 4 primary communication styles: Goal-Setting, Lifestyle, Stability and Information. There is a lot you can learn about people and how their brain processes information:

  • Learning Style
  • Communication Preferences
  • Information needs for Decision-making

Iceberg picture

With this knowledge, you can make some simple adjustments to how you approach a person to help them absorb the information, understand why your communicating and ensure they take away the points you feel are important (the ability to influence them.)

8 Simple Tips to Adapt Your Communication Style for Others:

If you are interacting with a Goal-Setter primary communication type:

1. Start with the End Goal in Mind – What is the purpose of the interaction and how does it connect to your audience’s goal (what’s in it for them?) Use bullets and executive summaries to convey more information with fewer words. Details can be provided after the summary if needed, but Goal-setters don’t read long emails/blogs or sit through long presentations.

2. Provide Options – If you only give them one recommendation or option, you will most likely get pushback or a “no.” They want to be able to make a choice. They will likely want to discuss it.

If you are interacting with a Lifestyle primary communication type:

3. Explain Who is Involved -Being more relationship-focused, their brains first have to understand who is involved, their role, how they fit into the discussion and what they may think about it. They also respond well to social events and informal communication methods.

4. Use Visuals – Rather than send a long email or written instructions use a picture, infographic or demo to better help their brains process the information and retain it. They need to experience it to learn.

If you are interacting with a Stability primary communication type:

5. How You Say It Matters – The right tone is especially important for this group. They prefer supportive and low-risk interactions and solutions. Email may not be the best choice, but if you do send an email, be very careful to consider them as a person and how they might perceive it or “feel” about it.

6. Slow Down and Reassure – They like to be thorough and appreciate step-by-step instructions. They want to be very comfortable and sure of their actions before they act.

If you are interacting with an Information primary communication type:

7. Stick to the facts – They prefer to primarily focus on tasks/results and do not necessarily want a lot of social interactions. They tend to be logical, want to “get to the truth,” and understand “why,” therefore, they are more comfortable when they have more details, information, and research.

8. Don’t Try Appealing to their Emotional Side – I repeat, stick to the facts, policies and procedures, and the logical explanation. If you try to sway them with name-dropping, leverage office politics, oversell a concept with marketing hype or appeal to their emotional side, you will actually repel them, not influence them.

What’s your communication style? For more information on the research, how it works, or how to apply this knowledge, contact inquiries@dnabehavior.com.