Financial Personality

5 Tips to Apply in Managing Your Clients Behavior Gap

5 Tips to Apply in Managing Your Client’s Behavior Gap

Improve Client Retention and Financial Performance by understanding Financial Behavioral Biases

So what exactly is the behavior gap? Can it be bridged? Yes; it’s just a matter of developing Financial EQ through behavioral awareness.

Behavior Gap3

Good questions for financial advisors to ask and answer:

  • Why do some investors repeatedly lose wealth and others accumulate it?
  • Why after significant time spent working on an investment policy statement do investors react in the moment and revert to long-held beliefs that may hurt their returns?
  • Is there more to investing than just analyzing numbers and making decisions to buy and sell various assets and securities?
  • How aware of their own behavioral bias are investors? How aware are you as a financial advisor, of yours?

For investors to be financially successful, they need to be able to manage their “emotional reflex system” when events happen; they can’t control the markets, but they can understand how to manage their reaction to them.

The behavior gap doesn’t just apply to investors; as a financial advisor you are equally likely to be suffering from behavior gap. Your thinking and actions are influenced by the same set of factors and biases that affect investors in their financial decision-making process.

Qualities such as investing time in building relationships to build trust will help keep clients from making emotional investment mistakes. However, using a highly validated discovery process with clients can reveal decision-making behavior immediately. Further, it uncovers goals and aspirations for their future and importantly it will also reveal biases that will need to be managed.

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Source: www.schielwealthmanagement.com

According to Carl Richards in his book The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money’ he observes:

It’s not that we’re dumb. We’re wired to avoid pain and pursue pleasure and security. It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right but it’s not rational. http://www.behaviorgap.com/book/

Simply put – this is an emotional response due to behavioral bias; it’s a deviation from logic and reasoning right at the point of decision-making; under pressure, it’s our go-to’ inherent decision-making behavior; a gap that must be bridged if the client/advisor relationship is to be sustained.

5 Tips to cure’ the Behavior Gap:

  1. Acknowledge there is one. Find out what triggers emotional reflex systems, that is, the inherent go-to’ decision-making approach.
  2. Don’t just focus on the behavioral bias of investors. You as a financial advisor will want to be successful in your peer group. You might be driven by reputation, compensation, building business, managing investors’ expectations. Never assume’ that as a professional you are not biased.
  3. Carefully review client’s goals, financial capacity; drill down to learned behaviors, experiences, values, and education. Get below the surface.
  4. Every person has an inherent hard-wired behavioral style which is the core of who they are and can be predicted with the right discovery process.
  5. Communication is the key: you must understand how to uncover a person’s unique communication and learning style. Customize your approach to your investor’s individual behavioral style- only then will you bridge the behavior gap.

Behavioral psychologists have long understood that people are not entirely rational. We’re influenced by a range of factors, from emotion to cognitive biases, which make a less rational choice seem more appealing. If financial advisors are to understand the behavior gap that will exist both for them and their investors they need to learn about cognitive biases and other irrational behavior. Gaining this insight will deliver more effective and informed decision making which will stand up under market pressure.

 

Financial Advice is Becoming a Commodity

Financial Advice is Becoming a Commodity: Get on Board or Get Left Behind

It’s inevitable. Social media is taking over marketing. Further, the “robots” are also storm trooping the industry in how financial advice is provided and how investments are managed.

The reality is that many parts of the financial advice process and investment management are becoming a commodity. As a consequence, many in the financial advisory business could suffer as a consequence of this move away from the traditional view of financial advice.

However, you can take advantage of this shift to increase your practice. The key to success is to differentiate your service model from other financial advisors and the increasing array of online resources and systems. The number one strategy for financial advisors is right under your nose at the initial step of the financial advice process. That is to have a much deeper understanding of your client’s needs and related behavioral finance biases, and to directly involve the client in the discovery process to increase engagement. Inadequate 5 to 20 question assessments that address only risk’ won’t cut it anymore. Neither will guess who the client is. Clients should be given the opportunity to participate in the completion of a comprehensive process which then enables the advisor to comprehensively know their client and their life journey.

As the new landscape for advisors evolves, you don’t have to bemoan it. If you adapt, you can seize this as an opportunity to actually grow your business. Look at the areas of the advisory process that can and should be commoditized. Leverage these technical platforms so that you and your team spend less time on investment management. Educate them, not only on the technology and investments, but more importantly, on how their approach to finances, investments and money can move clients towards achieving their life goals. The key starting point is to holistically identify the client’s financial personality. Then use those insights to help clients manage their behavioral biases to prevent setbacks or missed opportunities and further grow their nest egg to achieve their goals.

It’s time for financial advisors to recognize that clients don’t have to be lost to the new world order of do-it-yourself’ financial planning. Those financial advisors who have long ago invested in building relationships based on knowing their clients, knowing the plans they have for their lives, knowing and being a part of strategizing their financial roadmap to achieve their goals will not lose clients and actually grow their business.

Here are 7 practical tips:

  1. Use an independently developed and robust questionnaire based discovery process with clients at the point of entry and at annual reviews with existing clients. This will give you a clear insight into what they want to do with their finances.
  2. Focus on goals-based life planning and the financial plan to achieve those goals.
  3. Take the mystery out of investing. Proactively build areas in your advisory process where clients can manage their investments for themselves. This will keep them connected with you as their ‘go-to guy.’ Be a source of knowledge for the client.
  4. Build trust. Get to know how much clients understand markets and then educate them around the gaps (this builds trust.) Knowing their communication style and how they want to work with you will build trust quicker.
  5. Focus on the relationship being a two-way partnership.
  6. Match advisor to a client based upon their financial personality and communication style. This is a key differentiator for success.
  7. Help clients to understand their behavior during market movements. Understanding behavioral finance should be bedside reading for every financial advisor.

Time to develop your value position as a financial advisor. Don’t get left behind in the commoditization of the traditional financial advice process. Embrace the exciting Behavioral Finance future.

Try Communication DNA or Financial DNA to see how you can become the Financial Advisor of the future.

Banking Blog

Does Your Bank Truly Know What You Need?

A few weeks ago, Craig Moon who is a high net worth investor, received an unsolicited email from Renaissance Transactions Bank in New York requesting he invest in a new mutual fund investment opportunity. Apparently, the offer was being extended to all of the prospects and clients in the bank’s database who had previously filled out any kind of inquiry form.

Craig felt quite queasy in his stomach at receiving an unsolicited offer like this from a bank with whom he had no personal relationship. He had received similar emails from other banks before and gradually built up a lot of negative resistance to such approaches.

He couldn’t understand how a bank can make this offer when they hardly know anything about him. Craig’s experience in life taught him that if there is poor communication then the solution provider and what they offered could not be trusted. He wondered whether some of the banks were trying to get an edge on the consumer using faulty diesel-powered systems. After all, in the modern day age of Big Data research it would be reasonable to expect that a bank would at minimum use statistics and some casually built online surveys to roughly paint a persona of the prospect or client.

Craig reflected that given the recent stock market turbulence and increasing complexity of investing, this might be the time to find the right financial planning relationship.

 

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The Land Grab by Banks for Owning the Client-Centered Financial Planning Space

While I was hearing Craig’s story at a seminar, I felt motivated to tell him that there was a fresh approach to banking and financial planning coming. No longer would banks and financial planning firms be playing the guessing game of what is suitable to offer a client and how to engage them.

I told him of an emerging trend of established banks out there starting to make a grab for the space of being the leading client-centered brand that put the interests of their clients first. In fact, this is what the regulators globally are requiring and the Obama Administration is pushing with the Fiduciary Standard, although it has not been happily embraced by all, yet. For a few years now, some of the banks had been re-branding themselves as client-centered but had no high-quality scientific process which required active client participation to demonstrate it. Craig became intrigued and asked more about what to look for from a bank who would potentially meet his wealth management needs.

I explained to Craig that what he should look for was a bank who adopts the approach of “understanding people before numbers” by discovering who the client is first and then collaboratively building a financial plan and investment policy statement which recognizes his complete financial personality. Craig said he had started to read about the idea of behavioral finance in the newspapers and investing magazines. I said that behavioral finance should be the foundation of the bank’s approach to customized communication and to the recommendations they make.

Ultimately, our conversation ended with me suggesting to Craig that he ask each of the banks and financial advisors he interviews:

  1. What formalized processes do they have to implement a behavioral finance approach which will help him achieve his goals?
  2. Further, have the processes they use been built and tested by a reputable and independent supplier of behavioral systems or have they been developed in-house to fulfill “tick-the-box” requirements?
    The Key Features of the Ideal Financial Planning System Powered by Behavioral Finance Insights

A few days later, at Craig’s request I gave him, in email format, a more specific list of the features that should be present in the financial planning service model to fit within the “new behavioral economy” age of financial planning:

  1. Clear organizational messaging: the “why” and the “mission” for delivering a service that helps clients live a quality of life based on who they uniquely are, in harmony and without regret. Put another way, helping every client in a customized way to “Live with Meaning.”
  2. Completion of an online activity at the banks very first touch point with the client: to discover the client’s communication style and the desired client service experience using a robust scientifically validated process.
  3. Customized first meeting experience with a relationship manager: someone who can naturally create the right environment for the client to share what they need and expect.
  4. Assignment of a wealth management team matched to the behavioral style of the client: to deliver a service that matches what the client wants -financial planning, investment management, philanthropy, family business etc.
  5. Completion of an in-depth online activity to comprehensively discover the client’s financial personality: the starting point – to reveal their natural instinctive behavioral style. This is not just a standard 5 to 20 question risk profile invented in the marketing department which can be manipulated and rarely tells the truth in down markets. Rather, a robust, scientifically validated process which objectively uncovers the client’s broader set of behavioral biases (including risk-taking) that strongly influence their decisions. Also, the financial personality reporting must be provided to the client for transparency with the comparison to the advisor.
  6. Completion of a goal-based questionnaire addressing balance across the key areas of life: to prioritize the needs and wants to be factored into the financial plan and investment portfolio design. Ideally, each of the client’s specific goals is addressed in the portfolio design.
  7. Real-time behavioral management of every client: during periods of market volatility on their unique terms. Use of online tooling to enable the client to monitor on a real-time basis their own “Market Mood” and patterns of behavior.
  8. Bank compliance processes: providing real-time monitoring of the recommendations made to each client with respect to their financial personality, financial capacity, and goals. The client should know that the bank will use exception reporting mechanisms to ensure their advisors keep the solutions offered within acceptable boundaries.
  9. Bi-annual review: conducted in person with the client or virtually using video.
  10. An advisory team that serves as the Wealth Mentor of the client: they need to adopt a coaching approach through asking powerful questions that transform the client’s thinking as they go through life transitions. Further, the firm and advisors demonstrate through this approach that the client is at the center of the relationship and not the bank’s fees.

Craig called me two weeks later and said that after extensive research and introductory phone calls he found many banks and financial advisors who said they delivered this service but actually did not. However, he was pleasantly surprised to find some leading banks and financial advisors were on this pathway. All of those firms on the right path were those using the Financial DNA behavioral finance platform developed by DNA Behavior International.

Craig made the decision to start working with the wealth management division of a solid US regional bank. He added that his research had revealed large banks and financial advisory firms in Canada, Australia, England and Europe moving this way.

I said to Craig, that as banks and financial advisors realize that relationship building is about customizing the communication with clients and the solutions offered, then they will win. Those who think relationships are only built on rates of return will fall far behind. Conversely, banks and financial advisors who act as a guide to clients in the financial planning process, rather than dominate them with transactions, will, within the next 3 years, grab significant market share, as well as, reduce the business risks of compliance.

Financial Advisors- Behavioral Finance is not Psychobabble

Financial Advisors: Behavioral Finance is Not Psychobabble

It’s no good screaming at your clients if they make dumb decisions. As a financial advisor, you need to stay on top of things. What’s your strategy to manage clients during market shifts? Some clients tend to make some very strange decisions when it comes to how they react to market movement and managing their money, not to mention taking advice from ‘friends‘.

If clients, for example, follow the herd and make irrational decisions regardless of the advice you give them, it will help you to understand behavioral finance to reveal core behavior and how to address it. If you don’t you will crash and burn as a financial advisor and be surprised by their actions and reactions.

Financial Advisors Behavioral Finance is not Psychobabble1

Source of photo: Google Images. Businesswoman_Stressed_MI600.jpg www.thinkadvisor.com600 338Search by image Emotional Decision-Making

Regardless of great financial advice, sometimes clients have a tendency to follow each other into precarious financial situations. They make foolish decisions and then expect the financial advisor to help them correct them.

Madison is a high income earning young professional. She leads a busy life and has just been promoted to a senior role meaning she has even less time to manage her money. She has always managed her finances successfully and has her own investment portfolio. She retains a financial advisor and makes it clear that she wants to continue to grow her portfolio but with low risk.

Madison is a very smart woman and somewhat reserved. In the busyness of her new position, she allows a group of outgoing vocal colleagues to persuade her to invest in a high-risk opportunity. Madison loses a significant amount of money.

As soon as the financial advisor is informed about this issue, she profiles Madison. She needs to understand how this smart intelligent woman could have been drawn into making such a foolish decision.

Having established Madison’s financial personality, the financial advisor is now able to provide Madison with insight into her decision-making behavior. Going forward, the financial advisor will be better able to manage Madison’s emotions and decision-making by customizing a financial plan to make improved long-term investment decisions.

Had the financial advisor known Madison’s financial personality up front, disaster could have been avoided.
Independent research shows that 93.6% of your role is the behavioral management of clients.
Source: Professor Meir Statman 2000.

Financial Advisors Behavioral Finance is not Psychobabble2

 

Robo Platforms Are Missing Personality

Robo-Advisor Platforms Are Missing Personality

In the last couple of years, Robo-advisor investment platforms have taken an important position in serving the middle and lower markets for financial planning. They are here to stay and should be encouraged. The question is does the Robo model for investments in its current format completely work? Like many new innovations, the problems are somewhat hidden when the markets are hidden. Where the Robo platform is completely stand-alone and totally independent of direct advisor input then the risks increase.

Then, also let’s consider what do investors want? Gallup research shows only 9% of investors want a completely automated service, and this is mainly the younger investor. Therefore, 91% of investors want some human input in their financial planning. Refer to the following research:
http://financialadvisoriq.com/c/1148733/123753/investors_want_both_humans_robo_advisors?referrer_module=emailMorningNews

The issue I see emerging for Robo platforms is that when there is a sharp and/or sustained correction downwards then there could be a mass exodus with a bloodbath of losses. After all, behavioral finance research shows us, people will, in varying degrees, make emotional decisions at the wrong time and follow the herd out of the market. Yes, the Robo platform may have many clients, but they will not be able to communicate with them when negative events happen. Similarly, there is no incentive for the Robo platform to communicate with investors as the market keeps going up and many get out of their comfort zone. In fact, the Robo is incentivized to keep having these people sign-up.

Overall, the structural problem for Robo platforms, as they currently stand, is that they do not know enough of the in-depth financial personality of the investor. The investor is served in a “one-size fits all” way based on a set of algorithms which have no relationship to who they are. The downsides are the Robo Platform does not know:

  1. How to communicate with each investor on their unique terms. Put another way, they do not know how to re-frame information so that it is understandable to the investor.
  2. The behavioral biases of each investor which will drive their decision-making (for instance to name a few, loss aversion, following the herd, taking a consolidated view, over trading).
  3. The correct risk profile which will influence portfolio allocation. Some of the Robo’s have a few questions that relate to risk and others make potentially false assumptions based on demographic data. Not all Millennial’s and Gen Y’s with a high income are risk-takers.

The Robo platform would be greatly strengthened if it had a validated financial personality discovery process incorporated into it. The ROI would be significant in the following areas:

  1. The ability to customize communications from the first point of engagement in the sign-up process. This would not help the initial sign-up process but also ongoing marketing.
  2. Enhance the capability to manage investor emotions in volatile markets.
  3. Provide a more robust framework for making suitable recommendations to meet compliance requirements and also monitor them.

Ultimately, a Robo investment platform will not be sustainable on a long-term basis if there are no mechanisms to “Know, Engage, and Grow” the investor clients. This means that there must be robust online solutions to discover the client’s financial personality and a place for human interaction. These elements can be incorporated on a cost-effective basis and to achieve scalability which is needed to bring financial planning to the masses in a safer way.

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Don’t Let Behavioral Biases Cost You Money!

A key principle to remember is that each client reacts differently to the same market events. This is because they each have a unique mix of behavioral biases. This begs the question, how will you manage your different clients’ emotions as the market changes?

In the financial planning process, some clients tend to make financial decisions that are based on past experiences, personal beliefs, what they like and to avoid mistakes. Fewer people make well considered forward thinking, long-term life financial planning decisions. But, each approach suggests a bias.

Writing for News Limiteds The Australian, Platinum Asset Management co-founder and managing director Kerr Neilson asks the following question.What is the biggest factor in investing? What is it that separates the winners from the losers? You might think its experience or numeracy or a particular understanding of an industry. All of these factors will be relevant, but the distinguishing feature is surely the presence of bias.

This is an interesting thought and much in evidence in the financial fraternities articles and blogs. But what is bias? How does it play into financial decisions? Can it be uncovered?

Investopedia explains ‘Bias’ as:

Some common psychological biases plaguing investors include: representative bias, cognitive dissonance, home bias, familiarity bias, mood and optimism, overconfidence bias, endowment effects, status quo bias, reference point & anchoring, law of small numbers, mental accounting, disposition effects, attachment bias, changing risk preference, media bias and internet information bias. http://www.investopedia.com/terms/b/bias.asp

Can behavioral biases be uncovered?

Yes they can, because each person has an inherent hard-wired behavioral style which is the core of who they are and can be predicted with the right discovery process. Behavioral biases influence not only their behavior, but also their decision-making process. Daniel Kahneman (winner of the Nobel Prize in Economics) refers to this as a persons automatic decision-making biases in his 2012 book “Thinking, Fast and Slow”.

Robert Stammers, CFA Director, Investor Education notes in his article for Forbes – Perhaps the best advice for individual investors regarding bias is this: Avoid trying to outsmart the markets and instead work to outsmart yourself. Through self-examination and reflection, learn to recognize your own biases when they rear their heads.
http://www.forbes.com/sites/cfainstitute/2011/12/21/three-behavioral-biases-that-can-affect-your-investment-performance/2/

Financial advisors need to be able to uncover a clients biases. Having this insight in advance of planning not only enables the advisor to educate the client, but it also flags areas where the client can be steered away from their emotional bias, which results in taking action based on feelings instead of facts.

Writing for the European Financial Review, H. Kent Baker and Victor Ricciardi observe:Investor behavior often deviates from logic and reason. Emotional processes, mental mistakes, and individual personality traits complicate investment decisions. Thus, investing is more than just analyzing numbers and making decisions to buy and sell various assets and securities. A large part of investing involves individual behavior. Ignoring or failing to grasp this concept can have a detrimental influence on portfolio performance. http://www.europeanfinancialreview.com/?p=512

A useful starting point in the advisor/client relationship is to uncover and understand that you, as an advisor, have your own investment biases and blind-spots that must be managed so that clients are not influenced by your behavior. Revealing these biases for the advisor, as well as the client, ensures a) the relationship will be built on trust and b) it will help mitigate the influence bias or predilection can have on decision making.