Risk Tolerance

Are Advisors Asking the Right Questions?

“How do financial advisors know what questions to ask if they don’t know how to communicate with me?”

I wonder how many every-day working people believe that only the rich make long term plans for their financial future. Could it be that the financial industry tends to position itself as available only to advise on family wealth, estate planning, finding ways to make the rich richer or manage their large inheritances and forgets the millions of others who need plans, want to be financially secure yet feel uncomfortable about discussing their hopes, dreams and limited finances with an advisor?

Byron R. Moore writes the following in his article, Financial Fundamentals: Is financial planning about ‘predicting’ or ‘positioning’?:

Question: How am I supposed to do any financial planning these days? I dont know who is going to be president, how the financial crisis in Europe is going to turn out or how we are going to deal with our national debt. It is difficult to know what to do next.
Answer: Really? Is it really that difficult? Or are you just stuck because your concept of financial planning is proving to be fatally flawed?

When reading this article it occurred to me that maybe a more valid question from potential clients might be will my money be safe if I take your advice. This doesnt necessarily refer to their ability to understand and manage risk; maybe its more about allowing the client to share their genuine concerns, their lack of knowledge about the financial industry, and their unpretentious, down to earth approach to their finances.Financial planning questions

The world of financial advice is highly competitive; learning how to build your business and increase your bottom line could be as simple as knowing how to communicate with your prospects. Understanding their communication style from the very first point of connection (phone call or meeting) through every interaction over the lifetime of the client relationship could be critical to the sustainability of your business.

Advisors need to understand their own communication and behavioral style up front before the first meeting.? This insight will enable advisors to uncover client communication styles and enable the advisor to adjust their approach in order to effectively engage their client into the conversation.

If as an advisor you are genuinely able to communicate your interest in talking to the client, once they have revealed that their financial status is middle-class or below, you will build confidence in the client and begin the process of developing the relationship. As an advisor its critical to the process not only to be client focused but to be able to uncover information that will result in sound and appropriate advice being given.

Seeking financial advice is a big step for many people. The industry needs to better understand their behavior and communication from the perspective of potential clients. Only then will it truly be able to know the right questions to ask potential clients.

You never really know a man until you understand things from his point of view, until you climb into his skin and walk around in it. – Lee, Harper. To Kill a Mockingbird. J.B. Lippincott & Co., 1960


 

 

 

 

 

 

 

Carol Pocklington is a Human Behavior Solutions Analyst at DNA Behavior, assisting with the research and development of behavioral products. DNA Behavior helps grow behaviorally smart businesses and financial advisors worldwide to increase competitive advantage using the most reliable behavioral discovery and performance development systems on cutting-edge technology platforms. Solutions are delivered in the areas of client experience management, financial personality management and human capital management.

Visit the Financial DNA website to learn more. |??? Try Financial DNA Free for 30 days!

Why Your Behavior Influences Your Own Wealth More than Market Movements

Every so often I meet a personal investor who will tell me that now is the right time or the wrong time to invest, depending on whether the markets are going up or down as well as depending on that individuals past experience.? Despite having 30 years of investment experience I never get into an argument with them because I know something they dont. Namely, very, very experienced investment professionals rarely, if ever, out think the markets. Even the greats such as Warren Buffet and Anthony Bolton acknowledge that markets cannot be outguessed in the short term and their own success owes more to long term holdings rather than short term trading outlooks.

In any event, many people who are inexperienced?in dealing with?investment markets (and even some who are experienced) tend to look for signs that they are right in the perspective of what is happening at any point in time. They look for reassurance about what they are thinking, or more correctly hoping, can be confirmed by one or more public facts about the markets. In Behavioural Finance terms this is referred to as Confirmation Bias. Put simply, people favour information that confirms their beliefs or hypotheses even if such confirmations turn out later to be false indicators.

This behaviour is also closely linked with Herd Mentality. In essence this is where people are influenced by their peers by adopting certain behaviours and?follow trends as well as possibly purchasing items. Investment history is riddled with Herd Mentality events from Tulipmania?in 1637 through to recent times when global property bubbles made?many seem smart before looking extremely foolish.

Why Your Behavior Influences Your Wealth More Than MarketsNewness Bias is also a well documented behavioural trait and is the desire to give more weight to recent information and ideas usually to support a particular investment outlook. This helps to support the belief that one is right because the latest set of economic data says so. Does this sound familiar?

The use of these three outlooks on investing works both ways. If markets are going upwards, they are used to justify why one should invest. Similarly, if markets are going in the opposite direction they are likewise used as justification as to why one should not invest in particular assets. It just depends on your starting position.

So the question is, if one cannot outguess the markets what should you do?

The starting point for all investing lies not in what markets are doing but rather in what you actually need in your own personal life. By defining what our own individual objectives are we can then set about expressing these in financial terms. Of course, such planning is not a simple process and requires a lot of thought but in my experience once this whole area is addressed properly investment decisions and their long term effects become more realistic, as does the evaluation of competing investment options.

After that it comes down to long term planning, and?not short term reactions to investment flavours of the month. The great thing about such an approach is it allows investors to exert control over their financial outlooks rather than being held hostage to them. In other words by controlling what we can control, namely our behaviour, we can have a disproportionate positive effect on our financial well-being. This isnt just my view or any recent perspective. Considerable research has been done on this.?As far back as?2000 Meir Statman, a distinguished economics professor based in Santa Clara University in California, produced research which showed that 93% of investor returns are influenced by their own personal decisions and not those of individual fund managers or indeed the performance of investment markets.

The bottom line? Before you make a decision to jump in and out of markets, think about what your investment objectives are and whether they are aligned to your, correct, asset allocation. If there is a mismatch then the issue isnt markets but is more personal. And for that you need to be aware of your own behavioural impulses as these influence your financial position more than anything else.

Work on Managing What You Can Control

93.6% of the financial planning process is the behavioral management of the client.

This point was brought to light for me in an entirely different situation: traveling in a major snowstorm.

We cant control the weather, but we can control your experience, said the flight attendant.? Too late, I thought.? After standing in various airport lines for over 8 hours and being treated poorly by every ticket agent and/or baggage claim handler, I was not feeling warm and fuzzy anymore.

managing behavior, behavioral finance, client communication, communication styles

Even as I checked into my hotel at 2am and was greeted in line by my enthusiastic pilot, I was not in the mood to be sold on the benefits of flying with this particular airline.

But it got me thinking.? My first impressions were made with the front- line staff who were dealing with a lot of upset people.? The higher up you went in the airline chain of command, the friendlier and more professional the staff became. They were all under the same stress of the storm, but the pilots and flight attendants probably thought the ticket agents were just like them and able to maintain their professionalism during these unusual conditions.

Lets examine the parallels in the financial services industry. Who is the first person I would come in contact with at your firm?? Are they trained in the behavioral management of your clients?? Do they even have the data in your CRM so they can easily remind themselves how to adjust their style to accommodate your clients?? Or, are you assuming they know how to deal with every clientespecially in a crisis?

The blizzards of the financial services industry come in the form of market corrections, death of a spouse/family member, health challenges and even the birth of a baby. Each client is different and that is especially true of partners in a couple.

As an advisor, it is important to have a defined process that actively and uniquely engages each client/partners in the decisions that will affect their financial life. And that starts with the receptionist to the client service staff and to every client facing staff in your office.

Empower your staff with the behavioral data that will make a difference. That way you can honestly say, We cant control the markets, but we can control your experience.


Peggy Mengel ? Vice President, Human Behavior Solutions Advisor at DNA Behavior

Specializing in financial services, Peggy uses behavioral intelligence to help businesses navigate human differences to unlock performance potential. DNA Behavior helps grow behaviorally smart businesses and financial advisors worldwide to increase competitive advantage using the most reliable behavioral discovery and performance development systems on cutting-edge technology platforms.

Visit the Financial DNA website to learn more. |??? Try Financial DNA Free for 30 days!

How Advisors Should Interact with Baby Boomers in the Pre-Retirement Phase

For so many years baby boomers have been excitedly planning their retirement; looking forward to trips around the world, being mortgage free, upgrading the car and so much more. This is the scenario that financial advisers are faced with when beginning their relationships with boomers.

How can advisers deliver difficult news, provide encouraging advice and retain these clients? Importantly advisers need to realize that boomers are becoming increasingly aware that they face an unsure financial future; but much has contributed to this current dilemma they face,? not least of which is, as some commentators note, the 60% lost value in investments because of the economic crisis.Retirement Planning

According to statistical information provided by the Administration on Aging report, the age-65-and-older population grew 18 percent between 2000 and 2011 to 41.4 million senior citizens and the numbers are expected to continue to rise.

A study byAmeriprise Financial found that 93% of Boomer parents report providing financial support to adult children, 71% helped with college loans and tuition, and 53% helped them buy a car. However, only 24% describe their financial situation as putting away money for the future.

Emily Brandon writing in USA News? (Retirement News) says the following in her article, The Baby Boomer Retirement Crunch Begins:

“The boomers will be the first generation to overwhelmingly not receive some sort of guaranteed benefits from employers,” says Ken Dychtwald, president of the consulting firm Age Wave and author of “A New Purpose: Redefining Money, Family, Work, Retirement, and Success.” “We now live in a 401(k) world where people are responsible for our own savings, and baby boomers have not done a very good job. It’s a generation that is going to struggle in old age in the absence of reliable anchors and support systems.”

How can financial advisers prepare for the boomer client?

  • It is very important not to believe everything you read/have read about baby boomers. Not all will have enjoyed fully the fruits of their labor as they earned it so dont be tempted to make assumptions and deliver one size fits all advice.
  • Be behaviorally smart; ask the right questions; spend time finding out what their plans have been for their future; ask them about their family and any financial promises they have made to them i.e. clearing childrens mortgage etc; get them to describe the future they see for themselves.
  • Remember that you too will one day be facing this age group. Limited finances will not be their only concern. Empathy is a key here. Confronting this season of their lives and their uncertain investment returns together with facing the potential of losing their longed for dreams in their retirement make the relationship a tricky one for advisers to navigate.

Behaviorally smart advisers should invest quality time into the boomer generation. They too will have read the doom and gloom prospects written about their financial future. Its a key strategy for you as the financial adviser to identify the real gap between their current/future financial positions and determine whether the gap is as big as they imagine in terms of the dreams they have for their retirement future.


 

 

 

 

 

 

 

Carol Pocklington is a Human Behavior Solutions Analyst at DNA Behavior, assisting with the research and development of behavioral products. DNA Behavior helps grow behaviorally smart businesses and financial advisors worldwide to increase competitive advantage using the most reliable behavioral discovery and performance development systems on cutting-edge technology platforms. Solutions are delivered in the areas of client experience management, financial personality management and human capital management.

Visit the Financial DNA website to learn more. |??? Try Financial DNA Free for 30 days!

Are Clients Innately Loyal?

You work so hard to get new clients but how do you ensure that you keep them?

Recent research by PriceMetrix Inc. found that clients rarely leave their financial advisor in the first year.? However, between one and four years, the client retention rate falls to 74%.

It is especially important to boost your service efforts during this critical time-frame as well as to demonstrate to the client that you are a trustworthy and caring professional whose knowledge and expertise will guide them to successfully reach their goals.

But what causes a client to leave an advisor? Research conducted by Financial Advisor magazine found the #1 reason that clients leave advisors is failure to communicate on a timely basis.? The #2 reason was listed as failure to understand a clients goals and objectives. Those clients who are not emotionally engaged with you turn to someone else when life transitions take place.

client behavior, behavioral finance93.6% of the financial planning process is the behavioral management of the client.? So much of what you need to know about the clients behavior and values is hidden well beneath the surface and takes more than a year to uncover. Yet starting in year 2 is when your relationship is the most vulnerable.

Knowing these facts, the number one action you can take is to incorporate a behavioral discovery system in your new client on-boarding process. Then build the key behavioral insights into your technology systems (such as CRM) so that they are at your fingertips for every client interaction.

For example, lets take one simple aspect of your personality and see how that might be perceived by different client communication styles.

You are an outgoing advisor, high in energy and enthusiasm.? You like to share stories of other people experiences because you feel potential clients can relate to the other people you have helped.

Your energy and fast paced talking could exhaust a client who is more informational in nature.? It could sound edgy to someone who is more stability oriented.? And to a goal oriented individual you may seem to go on talking forever without ever reaching a point.

And that is just one aspect of your personality.? Are you still wondering why clients rate failure to communicate as the? #1 reason they leave an advisor?

Now imagine incorporating a behavioral approach in your practice.? Prior to your first meeting, a new client takes 15 minutes to complete a discovery process.? Your CRM now contains the specific behavioral data points so you know how to adapt your style to conduct the perfect meeting, how to continually service them, and how to create a unique experience for every person in your office who interacts with that client.

You can create the level of service and communication that actively engages your clients at the very start of your relationship. Dont risk losing your clients after the honeymoon stage.

Take action today and explore some ideas at http://www.financialdna.com.


Peggy Mengel ? Vice President, Human Behavior Solutions Advisor at DNA Behavior

Specializing in financial services, Peggy uses behavioral intelligence to help businesses navigate human differences to unlock performance potential. DNA Behavior helps grow behaviorally smart businesses and financial advisors worldwide to increase competitive advantage using the most reliable behavioral discovery and performance development systems on cutting-edge technology platforms.

Visit the Financial DNA website to learn more about becoming a behaviorally smart advisor.

Why Cant Investing Be Risk Free?

In writing this piece, Im inclined to reflect on the saying that there is no such thing as a free lunch. Everything in life has both negative and positive aspects to it. Its just that sometimes we dont see them or if we do, we choose to ignore them in favor of the more comfortable outcome that we desire.

Investment Risk, Behavioral FinancePersonal investing falls into this overall category as well. Over the many years of advising clients I have often been asked about what do I think about a particular investment? Is it a good investment? Should I invest now in it?

Sometimes the client conversations are more direct and I am told that another adviser is generating far higher returns for his investment clients than I am. And surprisingly I will agree with these assertions that I am not producing as high a return for that particular client. But like everything in life, it depends on the context. In the investment world it is always possible to generate high returns but not necessarily high returns within an investors personal risk tolerance! And this is the point about personal investment advice being personal.

The no free lunch equivalent in investing works at both ends of the scale. High investment returns do not come without taking high investment risk. Sometime the risk is that extreme its like placing a bet on a single number on a roulette table and hoping that the ball does not land on one of the other 35 numbers. An all or nothing scenario. If it falls on your number youre in the money. If it doesnt youre wiped out. This type of approach was very evident in a cold analysis of the fallout of the Celtic Tiger.

At the other end of the scale is the apparent security of holding cash. But this too comes with its own risks. Leaving aside the potential of not keeping up with inflation and a fall in the purchasing power of your money, the financial creditability of the bank that you leave your money with needs to be investigated before depositing your funds and thereafter kept under constant review. Just ask the deposit holders who had more than ?100,000 held with Newbridge Credit Union or even the Russian Oligarchs who lost millions that were held on deposit with Cypriot banks.

Good investment is about spreading risk to match an investors appetite to that risk. Take too much and the investment monies might get decimated, take too little and you will probably have a discontented client. The key to investing lies actually in the client, not the investment market or the investment product.

The key to good investing is figuring out what the appropriate level of risk is and means identifying:

  • The goals of an investor and the financial consequences of such goals,
  • The financial ability of the investor to rebound if the investments underperform or get destroyed,
  • The investors risk tolerance in the event that the investment turns sour.

This is not a one size fits all agenda. Proper investing means personal investing with due reference to the individual. Of course, this is the theory. Sometimes reality produces blindspots in investors perspectives such as an unrealistic investment return needed to sate an appetite for an unsustainable lifestyle. Investment advisers are not magicians ? they cannot perform miracles just because a client wills for an unrealistic outcome. Any adviser who presents themselves otherwise is either a charlatan or a fool. Those that blindly followed Bernie Madoff in his exploitation of his private investment clients realised too late that they were the victims of an elaborate and elongated Ponzi scheme.

The bottom line with investing is that risk is everywhere but not necessarily obviously everywhere. In the same way that Caveat Emptor applies to buyers, a similar warning is necessary for investors.


Eamon is a Human Behavior integrator at DNA Behavior, and one of Irelands leading independent fee based financial planners. His single goal is to help clients make wise decisions with their money now and for the rest of their lives especially in the areas of investing and retirement planning.

Visit the DNA Behavior website to learn more about managing financial behavior and risk through greater self awareness.