Financial Planning

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

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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.

Are your couple clients at risk of leaving your Financial Advisory Firm-

Do You Have “At Risk” Clients?

Do you know which of your clients are at risk for:

  • Leaving your practice?
  • Becoming a compliance nightmare?
  • Sabotaging their financial plan?

You may have more than you think since customer experience is the internal andsubjective response your clients have to any direct or indirect contact with your firm.

The two key words that should have you concerned are internal and subjective because you cant measure or control these aspects of your client.

According to the 2014 EY Global Insurance Survey, 89% of clients want more frequent, meaningful and personalized communications from their advisor. And in fact, 35% of clients leave to find an advisor who is better at communicating.

In order to retain your clients, you need to have an objective process to uncover a clients financial personality. As intuitive as an advisor might be, they can no longer afford to rely on subjective observations and open-ended questions. Using technology-based tools will soon be the new normal in the industry.

The combination of your baby boomer clients nearing retirement and the market volatility can easily lead to some unforeseen compliance nightmares. Why? Because emotions are heightened and clients who appeared risk tolerant and told you they were risk tolerant can suddenly change their mind. They were fine as long as the market was going up (or even down a bit) and retirement was years away. Now as they start to create their cash flows and realize they are in the withdrawal stage of life, market performance can make or break their golden years.

In addition, the stress and considerable psychological changes that your clients are going through as they near retirement may cause them to unknowingly sabotage your carefully created financial plan. You may have more difficult conversations with couples as the husband might have visions of expensive vacations while the wife is content on cutting back expenses.

What if you had this behavioral information at your fingertips from the very start of your relationship? Imagine a world where, in times of market volatility, you could pull up a list of all your clients, see their level of trust and have the customized communication step you should take at that moment. Youd find client retention increases, your compliance challenges stopped before they are given a chance to start and clients that commit to sticking to their financial plan.

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.

Market

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.