Financial Planning

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.

President Obama

Behavioral Insight to Be Used to Serve the American People – Presidential Executive Order

It’s not every day the President of the United States makes a stand on using behavioral insight to improve service delivery.

The executive order targets Federal departments, but could just as easily read across to every service provider…The Executive Order formally establishes (Social and Behavioral Sciences Team) SBST and directs Federal agencies to integrate behavioral insights into their policies and programs

If as suggested, understanding behaviors enable providers to deliver more effective services to the American people, how then will financial advisors introduce this approach with their clients? It’s where people are probably at their most vulnerable when discussing their finances. It’s where people are liable to make ill-thought through decisions under pressure. It’s where people are likely to revert to inherent behavior and bias.

Francesca Gino, a professor at Harvard Business School (which is a faculty affiliate of the Behavioral Insights Group at Harvard Kennedy School), writing in the Harvard Business Review says of the Presidential Executive Order..

This order reflects the evidence that scholars across a variety of fields – from behavioral economics to psychology to behavioral decision research – have accumulated in recent years that people often fail to make rational choices. Across a wide range of contexts, we often make foolish decisions that go against our self-interest.

It’s a fair comment – people fail to make rational decisions in many areas of their life. Much work has been undertaken in terms of how people react and make financial decisions when under pressure. If financial advisors are to play their part in delivering this Presidential Executive Order, then understanding the core hardwired behavior of clients is foundational.

Clearly, since the Whitehouse announced the use of behavioral insight in delivering services, helping people make a better life and financial decisions are no longer just going to come from smart strategies, new innovative products, improving technology and better information. Rather, it will be driven by understanding the behavior of those people and how they make decisions. In the financial planning context, closing the gap between a clients’ true financial behavior and the rationality required to make sound investment decisions requires a deep understanding of their financial personality. Therefore, gaining objectively measurable, reliable and predictive behavioral insights about how a client will make financial decisions before providing a product or solution is critical. Further, applying those insights in a Behavioral Investment Policy Statement will provide advisors with a customized framework to guide their clients in making decisions and minimize the impact of emotions.

The Presidents Executive Order has wide-reaching impacts for service delivery in every area of business. It has brought to the forefront of American business the need to understand behaviors and how their customers/clients make decisions. Research in this area of behavioral science has been around for a very long time. But now is the time to put the research into action in every field of business, government, and life.

 

Image source: www.theblaze.com

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.

 

Sales

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

 

Millennials and their Money- they are Savvier than you think.

Millennials and Their Money: They are Savvier Than You Think!

Companies are currently bending themselves out of shape in an effort to attract the 83.1 million Millennial [Source: 2015 U.S. Census Bureau] in the US to their offering or services. But what are they really doing to get to know Millennials as a group?

The Financial Services Industry could do well to recognize that Millennials are very specific about what they want from their Financial Advisors:

Millennials and their Money 1

Source: Millennials and Money Merryl Lynch

This survey highlights the importance of really understanding what Millennials want to do with their money, and what kind of relationship they want with their financial advisor.

The message: Get to know Millennials. Understanding the Millennials behavioral style will enable messaging to be targeted to the individual. Regardless of their age or generation – are the Millennials naturally spenders or savers, goal driven or content to build a balanced life, risk takers or cautious, trusting or skeptical etc.? Put another way, Millennials can be your “Millionaire Next Door” type who is frugal or that person who lives large, spending all they have in the belief tomorrow will take care of itself. There have been these types of people across all generations.

With this insight, find the most appropriate medium to converse with them. Revealing their behavioral style, core talents, and decision-making approach will ensure you get their attention if you translate that knowledge into a personalized offering. Remember, Millennials now represent the largest generation in the United States.

For every person, regardless of generation, there is always a lot going on below the surface that is motivating his or her life and financial behavior. Generally, these behaviors cannot be easily or quickly measured by human observation. This then makes it difficult to know how extreme and/or predictable the behavior will be.

A structured behavioral finance approach benefits both the advisor and the client by making the advisory process more tangible and robust. This is achieved by both the advisor and client participating in an objective financial behavior discovery process when the planning process starts.

A key point that financial advisors must always remember is that their behavioral style will influence how they perceive the investment markets, their clients, and the advice they give. Research studies show that advisors can have “Over-Confidence” and “Myopic Loss Aversion.” Therefore, advisors will have a behavioral bias that may influence their recommendations. This together with a population segment bias about Millennials, ensures the financial services industry will be unlikely to attract any new younger clients, regardless of demographic. In other words, do you already have a bias towards Millennials based on all the adverse publicity they are receiving? It’s a question worth asking and answering.

The Millennials are not dummies. According to a new survey undertaken by T. Rowe Price:

The 18 to 34 year-old set is better about tracking their spending and sticking to a budget than Baby Boomers. 75% track their expenses carefully. 76% of Millennials stick to a budget; 40% of Millennials have increased their 401(k) contributions in the past twelve months. Source: Millennial Investment Behavior.

Uncovering and understanding the behavioral style of Millennial clients and how they want to use their money allows the Financial Advisor to target their services more effectively. Harvard Business Review in their article “Stop Designing for Millennials” highlights the importance of understanding customer attitudes and behaviors:

Defining an ideal customer for a potential product or service using broader human themes allows you to create solutions that resonate with a larger group of people. ..Far too many companies take a “product-out” view of segmentation, where they essentially ask their customers to line up around their products by demographics such as age or income. They should take an “outside-in” view that orients its products around their customers’ attitudes and behaviors instead. Meeting the functional and emotional needs of a group of people is much more likely to generate transformative results than targeting a generational cohort with tenuous links. Source: Stop Designing for Millennials HBR

An example of this approach can be seen in the fall off of the banking system as we know it.

Almost all (88%) of Millennials do their banking online and half of those use their smartphone to do so. This experience leads about three-fourths of Millennials (73%) to be “more excited about a new offering in financial services from Google, Amazon, Apple, Paypal or Square” than from a nationwide bank. Since both the technology and the financial wherewithal to offer such services exists within these firms, the study’s prediction of “seismic” change in the near term future of banking appears to be at least a realistic vision of the future.” Source: “Millennials Invest More Time in Digital Banking,” emarketer.com, March 25, 2014.

As a financial advisor:

  1. You must learn how to communicate with Millennials on their unique terms defined by their behavioral style (regardless of the communication vehicle).
  2. If you know the Millennials behavioral style, then you know how to frame information to attract them.
  3. Get to know where your inherent bias and behavior sits. Then learn how to manage both.
  4. Stop reading Millennial-focused press clippings that cause undue bias or incorrect perceptions about them.
  5. Get to know the Millennials already in your world. That insight will be invaluable to what kind of an advisor you will be to your Millennial clients.
My client is an idiot; or is my behavioral bias showing-

My Client Is an Idiot, or Is My Behavioral Bias Showing?

Sitting having coffee with my financial advisor friend she is venting about a client. Apparently he’s an idiot, won’t listen, does his own thing, is over confident and clearly doesn’t realize how unpredictable the financial markets are! Doesn’t he know what’s happening in Europe?

As my friend takes a breath, I ask her if perhaps her behavioral biases are showing? I know her well, not just as a friend, but also having facilitated her completing the Financial DNA Discovery process. She’s Risk Averse and very Anchored with a focus on following a structured plan based on her own experiences. Yet, normally the advisor is perfectly capable of managing her personal bias when working with clients. So what was different about this client? Apparently, he heard about a great opportunity to buy a holiday home in Canada. In addition, he was going to buy a top of the range snow mobile. If this wasn’t enough, he intended to cash in considerable stock to have the mountain cabin extended.

The question then becomes has my advisory friend properly got underneath the surface to discover the true motivations of the client? It may be that the client has a deeper purpose for buying the holiday home that outweighs pure financial rationality.

In his article titled Quiet Conversations in the Journal of Financial Planning, Meir Statman discusses the Expressive Nature of Socially Responsible Investors:
Financial advisors accept many preferences of clients and construct portfolios reflecting these preferences. They accept clients’ preference for low-risk by constructing low-risk portfolios. Advisors accept the home bias of clients, even if they advise against it, by allocating little to international stocks. They accept clients’ desire for status symbols by investing in hedge funds that accept only the very rich.
Advisors accept clients’ preference to splurge on cruises, even if they themselves would jump overboard if forced on one. It is time for financial advisors to accept the preference for socially responsible investments as well. SOURCE: www.journalfp.net

Over the past year, my advisor friend had been talking to her client about socially responsible investing. She believed he had made the decision to address this by investing in socially responsible companies which also generated returns. This was an area that the advisor had considerable experience in. They had discussed at some length Amy Domini and her approach to ..shareholder advocacy and community investing which she saw as pillars of socially responsible investing. SOURCE: https://www.domini.com/why-domini/meet-amy-domini

I knew from the Financial DNA Discovery process that my friend’s natural inherent behavior was all about minimizing risks and keeping clients from making investments that did not seem financially rational. With further questioning, I began to realize she had allowed her own natural bias to rule the conversation. I also explained that in response to her reaction that she should consider the client’s perspective based on his behavioral biases. Had the client, based on his behavioral biases, made an investment which serves a lifestyle objective and also meets a more altruistic objective?

Behavioral bias in the financial decision-making area can be a real issue. Yes, the client may have initially appeared an idiot in terms of what he was proposing, but financial advisors need to park their bias and probe the client to understand what they are trying to achieve.

Wikipedia defines Bias thus: Bias is an inclination of temperament or outlook to present or hold a partial perspective, often accompanied by a refusal to consider the possible merits of alternative points of view. People may be biased toward or against an individual, a race, a religion, a social class, a political party, or a species. Biased means one-sided, lacking a neutral viewpoint, not having an open mind. Bias can come in many forms and is often considered to be synonymous with prejudice or bigotry. SOURCE: https://en.wikipedia.org/wiki/Bias

Subsequent meetings with the client revealed that he was cashing in his stock to make these purchases in order to provide a snow holiday vacation program for underprivileged children and their parents. This was his answer to being socially responsible. To my financial advisor friend he had initially appeared an idiot; had she managed her bias and reaction, she would have understood her client’s inherent behaviors and bias. Given the client’s biases and his choice, the advisors role should be to help maximize the disposition of the stocks to fund his investment.
Next time your first reaction is what an idiot’, stop and think about your own behavioral bias.