Practice Management

Uncovering Human Behavior Risks

Generally in business, and particularly in financial services, people associate risk with the markets or economy. What we fail to drill down into are the risks caused by human behavior. Another way of looking at this is to consider how people handle the market risks. What decisions do they make? What solutions do they come up with? How do they manage their emotions? How do they communicate?

In essence, the market risks can be managed or exacerbated by human behavior. So, what needs to be better understood is how your people are going to handle market and economic risks that may be impacting your business. This will be particularly important when they are under pressure. What are their blind spots? What are your blind spots? Then, how will you manage your people so the risks are better managed?

Through our Financial DNA profiles we are able to reliably predict how people will behave and therefore the risks they may cause. Will they take too many chances? Will they be too impatient? Are they too independent and not accountable? We have found that the profiles are able to provide great insights into the true behavior of people when they are under pressure. Having this information can help you put in place the right management controls and also to provide the individuals with more self-awareness of how they will make decisions which could cause or exacerbate market risks. There is no doubt a large part of the success or failure of businesses in the long term comes down to being aware of and managing human behavior. You only have to look at some of the major corporate and banking disasters to see this.

So how aware are you of the risks that your people could be causing to the future of your business?

Managing Risk

On the weekend, I had the great fortune to listen to a very inspiring presentation by Dr. Ben Carson. Dr. Carson is a leading pediatric neurosurgeon at the John Hopkins Hospital. In his career he has been a pioneer in performing highly risky surgery on children. He has a great book: “Take the Risk – Learning to Identify, Choose and Live with Acceptable Risk”.

Dr. Carson explained how he has often been faced with addressing the viability of taking a major risk in his work. What is there to gain? Will it be worthwhile? What if I fail? He made the insightful comment that if no one took a risk then today there would be no airplanes or cars or other technologies. Society always benefits from someone taking risks as lessons can be learned.

Is ducking risk the most productive way to live? Nothing will be achieved without taking risks. However, nothing will be achieved by taking inappropriate risks. The question then becomes what is an acceptable risk? In this regard, what is an acceptable risk to people will be different because we are all unique. Dr. Carson says you need to build your risk analysis model based on who you are, your values and also your learning style.

All of the principles Dr. Carson states can be equally applied to determining your financial risk tolerance and how you make financial decisions. The quality of life you build for yourself will be somewhat dependent on the risks you take. Ultimately, what is an acceptable financial risk will come down to your relationship to money. Further you and your partner need to check your “couple compatibility” index so that the risks taken are acceptable to both of you.

The Role of Advisors in Consumer Education

In my last blog I discussed how regulators are pushing for greater consumer “financial capability” and how the Irish regulator had recently issued a report on this. In the Netherlands, consumer financial capability is also a huge issue. Yesterday, I met with the Netherlands Authority for Financial Markets (AFM) along with our Country Operator, Symon Jagersma to discuss this topic. We also demonstrated how the Financial DNA Discovery Process is practically used to enhance consumer financial capability.

In demonstrating our Financial DNA process the key point that we made was that financial capability is very tied to understanding your own behavior. Your behavior is totally intertwined with financial decision making. The point being that how you make financial decisions and handle money is related to who you are, your life and your relationship with self and others. This is what the Financial DNA system provides for the consumer, and also the advisor. Financial DNA was originally built based on our passion to see the consumer receive education to become more financially empowered and in our view this starts with greater self-understanding. Consumer financial education does not start with understanding the technical aspects of alpha and beta and what a stock or bond is, or hedge funds.

So, we believe that financial advisors must play a greater role in consumer financial education starting with client behavior. This is not just about discovery of the client’s risk tolerance to build a portfolio. The process must also be educational on an on-going basis. Hence why we have promoted the role of the advisor as a “Wealth Mentor”.

Ultimately, I believe that the consumer should expect financial education from an advisor (or arranged by the advisor) which addresses self understanding about their financial motivations, attitudes and beliefs, how to set goals based on life purpose, and communication about money. Advisors are not being asked to be psychologists rather just have a greater awareness of what drives financial behaviors. So why not encourage the consumer to ask for this type of education when engaging the advisor? Most checklists out there, including from the CFP Board, only address issues like the qualifications and experience of the advisor and how fees will be charged. These points are important. However, there needs to be more depth in the advisor selection checklist with issues of what financial education the consumer will receive, the discovery process followed, and other important advisory processes that will be used to build the financial plan.

My advice to the consumer is to ask more questions up-front about the delivery of these types of financial education programs. By doing so, they will more likely choose a “top shelf” advisor who will look after their interests. If the advisor is delivering this type of education then it is likely that they will have personally participated, and hence be a more client centric advisor.

Information Flows Drive Energy

Last night I was called by a family friend (for the sake of the innocent, Amy) who was being pushed by an advisor to make a major decision in regard to transferring her retirement savings account. Why was Amy asking me the question?

Basically, she was feeling uncomfortable and very hesitant. And yet, Amy is normally a very confident decision-maker and is not completely inexperienced with financial matters.

The reason is that Amy’s financial advisor had made the recommendation and given her a huge envelope of documents to work through and absorb. Amy did not even know where to start. The whole thought of this was energy draining. Then the questions of what is the bottom line, what are the risks etc all come up. In essence, her level of trust is diminished.

The issue is not the fact that a proposal has been made. It is all about how the information has been provided. What you need to realize is that this was then negatively affecting Amy’s energy. What will happen? She could just make the decision and regret it later, or simply dismiss the proposal.

So, I gave Amy the very simple, but liberating solution, of asking her advisor to re-frame the proposal and provide in a summary format the benefits and costs of both the new solution and retaining the existing solution. The details can be checked afterwards as needed – which a detailed person will do.

What I am saying is that if you are the client, ask your advisor to communicate on your terms and then it will be easier to make a decision with comfort. If you are the advisor, build trust with your clients by asking them how they want the information provided. You may find that you will have a much happier and ultimately profitable client.

When people hesitate it is very often simply the way they have been communicated with. The information flows drive your energy to make good or bad decisions.

Who is Your Client?

I have had some really interesting conversations with advisors during the past few weeks during presentations. In particular, when I have been talking about family dynamics and asking the question who is your advice really impacting?

Generally, the obvious answer would be that your client is the person who currently has the wealth for which financial planning is required (the Wealth Holder). What about the beneficiaries of the wealth? Their lives are generally being impacted by the decisions that get made in the financial and estate plans. To some degree arent these beneficiaries also your client? In providing advice, you need to understand the unique behavioral styles of BOTH the Wealth Holder and the beneficiaries. If you do not take into account the unique financial personality of the beneficiaries then the plan could be useless once the wealth does transfer to them. Isnt this at least partly why we see so many financial and estate plans practically fall apart, breakdowns in family relationships, and generally dysfunctional behavior?

Also, as an advisor by learning to discover who the beneficiaries are during the life time of the Wealth Holder will help you cement long-term relationships with them.

Another interesting scenario that often comes up is that the person requesting the advice and/or managing the wealth is different to the Wealth Holder. For instance, if a son is managing the financial affairs of his mother whose behavioral style do you need to understand? Is it the mother or the son, or both? I have seen many financial advisors get into difficulties by not truly understanding the financial personality of the son. To a large degree you are dealing with the behavior of the son. You will need to know how to communicate with him and also how his view of the world impacts the planning for his mother. After all, the son will see the world through his lens.

Advisor-Client Chemistry

Do you have the right clients? This is a very topical issue for many financial planners, particularly those who have already built a business to a reasonable level. Actually, it is as important as the client selecting the right advisor.

In the end there must be a mutual relationship with the parties comfortable with each other. The relationship cannot start out (but it often does) with the client simply having dollars in the bank account and some financial planning needs, and on the other side the client believing the advisor has the skills and the necessary integrity. In fact, these are all assumed to get to the point of the first meeting. Bob Veres of Inside Information (www.bobveres.com) has written a great article this month called “Segmentation or Bust” mainly directed at advisors to consider the structure of their client base.

Our business is all about looking at the behavioral style of the clients and also the advisors. So, not unexpectedly, the approach we take is to match clients and advisors based on their behavioral style. This is very much an inside-out approach, however all great relationships start below the surface. Human behavior is at the core. The great thing is that the Financial DNA system measures natural behavior which means we can reliably predict the behavioral style of the advisor and client in terms of how that person will always be, particularly under pressure. I would say that our approach must still be blended with a number of other more traditional selection factors such as client size, service style, values, expertise, etc. that are mentioned in Bob’s article.

To help the advisor we have developed an Advisor/Client Compatibility Matrix. The matrix is a one page grid which matches profile styles based on the level of modification that will be required between advisor and client. To be clear, it does not say you cannot work with someone, but it does say who will be easier (green box on the matrix) based on less behavioral modification – this is where communication, chemistry, etc. is likely to be higher. Hence, this is where the relationship will be naturally more sustainable over a longer period with less stress. So if you are an advisor wanting to segment your client base a reliable starting point is now provided.

I do not necessarily advocate that you fire those clients who will require more behavioral modification (red box on the matrix). This will be a warning sign that you have to put more work into adapting to maintain the relationship. Although what you may wish to do is allocate these clients to a partner who is different to you or hire someone who is different to you to provide a complementary style. Many advisors have found this approach to be foundational for selecting their next hire. Or in how they deliver client service with a team-based approach. Hence, the planner may get the relationship started and then another person on the team steps in.

Are you interested in the value of your practice? Importantly for advisors, this approach also helps you to identify to whom you sell your business. The sustainability of the relationships and hence the revenue is critical to business value.