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De-Mystifying The Multi-Dimensional Nature of An Investor's Risk Profile

What Is The Misunderstanding Of An Investor’s Risk Profile?

In my journey as a wealth mentor over the last 20 years, and developing a rigorous scientifically based behavioral finance approach for the last 15, I have watched the risk profiling discussion seriously evolve from denigration to one that is being more intelligently embraced and applied. From advisors, clients, compliance departments, and regulators: what is the misunderstanding of an investor’s risk profile?

The problem is a combination of factors:

  1. Lack of clarity in the terminology as to what defines risk profile. For instance, interchanging risk tolerance, risk perception, and risk capacity although all have different meanings.
  2. Regulators worldwide have created principles based laws around risk profiling. But the legislative vagueness leaves too much open for interpretation leaving many firms doing virtually nothing.
  3. Compliance departments allowing “tick-the-box” methods of risk profiling along a broad array of approaches from doing nothing, to guessing, observing, or 3-to-5 hacked together questions.
  4. Applying the risk profile in a linear way based on a single measurement.
  5. Lack of understanding risk profiling at a deeper level because many of the instruments and processes are slapdash and poorly constructed. Even the better tools are one dimensional but are used to measure all aspects of risk, which is wrong and misleading.
  6. The Inability of advisors/consultants to integrate risk profiling and behavioral discovery into the client onboarding process.
  7. An unwillingness to have the client invest time in additional questionnaires viewed as distracting from getting on-boarded.
  8. The plethora of online investing platforms leveraging a quick & dirty approach to “knowing the investor” without any real insights.

The positive development now is that there is a heightened awareness of the need to adopt a more formalized behavioral discovery process, recognizing that risk taking, tolerance, and loss aversion are separate and measurable personality traits. And it’s a combination of all the risk factors, along with many cognitive biases, that interplay in how decisions are made.

Further, the compliance environment is requiring a strengthening in processes because the #1 issue on the agenda of regulators is dealing with the increase in investor complaints from a lack of suitability. Suitable solutions will never be able to be satisfactorily offered with demonstrated client buy-in unless EACH of the multi-dimensional elements that make up the risk profile is understood by both the advisor and the client.

For the last 15 years in my role as a wealth mentor, I have been guiding advisors and clients to understand the multi-dimensional nature of their risk profile as highlighted in the table below.

Risk elementsA risk profile is not a single number determined in a vacuum. In fact, it is a quantifiable number made up of many measurable financial and personality based elements. Whether you use the Financial DNA Discovery Process or other platform, I suggest you follow these key steps to identify and apply risk profiling:

  1. Use the client’s long-term risk profile for building a long-term portfolio and predicting how they will intrinsically make decisions over the long term (this is what Daniel Kahneman refers to as the Level 1 behavior). The correct questionnaire structure is absolutely critical to getting this result. In my terms, this is the hard-wired natural DNA Behavior. The questionnaire should be designed and independently validated based on sound psychometric principles.
  2. Understand the short-term risk profile based on current situational attitudes and how the client manages themselves (Kahneman’s Level 2 behavior). This is what many risk tolerance questionnaires seek to measure with varying degrees of quality and accuracy.
  3. Separate the various calculations of the Risk Need to achieve the client’s goals and Risk Capacity being their financial ability to sustain losses from the various personality traits associated with risk, risk propensity (desire to take risks), risk tolerance (emotional ability to live with losses), loss aversion (emotional reaction to markets), risk and product perception (reaction to situations and products ), and risk preferences (personal evaluation of preparedness to take risk in a given situation or with a product).
  4. Know each client’s Risk Composure – how they are feeling during up and down market movements. Some will embrace down markets and others will fear them. Of course, added to this is knowing how to communicate with clients during these different times.
  5. When wealth mentoring the client, help them set purpose based goals that are clearly defined for keeping them focused on what’s important. An IPS can be used as the guide-stick and for getting the client’s emotional buy-in.
  6. Finally, as an advisor, know the influence of your own risk profile and behavioral biases. Your mindset can inadvertently play out with the client whereby over time they eat your risk profile.

Here are other good resources that support the steps highlighted above:

1. OSC Study on Risk Profiling
2. Adopting a 2-dimensional risk tolerance assessment process
3. The sorry state of risk tolerance
4. How to measure risk tolerance

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.

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How Do I Get People to Listen to Me?

Do you understand the words that are coming out of my mouth?

1998 Rush Hour movie starring Jackie Chan and Chris Tucker

How many times have you been in a situation where you were trying to communicate with someone and it felt you might as well have been talking to the wall? I remember explaining a concept to a client using a PowerPoint and the client didn’t hear a word I said because he was focused on how he didn’t like the color scheme on the slide.

60% of communications fail because communication styles and preferences are not aligned. Based upon 1999 Stanford Research study.

Our brains are hard-wired to process information and learn a certain way. Most people accept this by now due to the volume of research on the topic. However, we can learn how to adapt to different communication styles to increase our effectiveness.

Sales increased 17% just by a salesperson mimicking the communication style of a potential customer. Harvard Business Review

Our research has identified that most people have one of 4 primary communication styles: Goal-Setting, Lifestyle, Stability and Information. There is a lot you can learn about people and how their brain processes information:

  • Learning Style
  • Communication Preferences
  • Information needs for Decision-making

Iceberg picture

With this knowledge, you can make some simple adjustments to how you approach a person to help them absorb the information, understand why your communicating and ensure they take away the points you feel are important (the ability to influence them.)

8 Simple Tips to Adapt Your Communication Style for Others:

If you are interacting with a Goal-Setter primary communication type:

1. Start with the End Goal in Mind – What is the purpose of the interaction and how does it connect to your audience’s goal (what’s in it for them?) Use bullets and executive summaries to convey more information with fewer words. Details can be provided after the summary if needed, but Goal-setters don’t read long emails/blogs or sit through long presentations.

2. Provide Options – If you only give them one recommendation or option, you will most likely get pushback or a “no.” They want to be able to make a choice. They will likely want to discuss it.

If you are interacting with a Lifestyle primary communication type:

3. Explain Who is Involved -Being more relationship-focused, their brains first have to understand who is involved, their role, how they fit into the discussion and what they may think about it. They also respond well to social events and informal communication methods.

4. Use Visuals – Rather than send a long email or written instructions use a picture, infographic or demo to better help their brains process the information and retain it. They need to experience it to learn.

If you are interacting with a Stability primary communication type:

5. How You Say It Matters – The right tone is especially important for this group. They prefer supportive and low-risk interactions and solutions. Email may not be the best choice, but if you do send an email, be very careful to consider them as a person and how they might perceive it or “feel” about it.

6. Slow Down and Reassure – They like to be thorough and appreciate step-by-step instructions. They want to be very comfortable and sure of their actions before they act.

If you are interacting with an Information primary communication type:

7. Stick to the facts – They prefer to primarily focus on tasks/results and do not necessarily want a lot of social interactions. They tend to be logical, want to “get to the truth,” and understand “why,” therefore, they are more comfortable when they have more details, information, and research.

8. Don’t Try Appealing to their Emotional Side – I repeat, stick to the facts, policies and procedures, and the logical explanation. If you try to sway them with name-dropping, leverage office politics, oversell a concept with marketing hype or appeal to their emotional side, you will actually repel them, not influence them.

What’s your communication style? For more information on the research, how it works, or how to apply this knowledge, contact inquiries@dnabehavior.com.

The Harsh Reality About Communication Styles

The Harsh Reality About Communication Styles

“We treat you like you’d treat you”. This commercial gained tremendous popularity for one reason: for effective service you need your communication styles to match each client’s unique style.

I like transactions that are easy, effortless, and fun. Save me some time and the aggravation of not having to wait in a long voicemail “queue” and I will reward your firm by sharing my positive experience at every opportunity.

But how would a customer service employee know that about me if they haven’t had frequent interactions with me? And furthermore, what difference does it make?

The hard-edged, measurable results are that you will get more business. According to Gallup research, 23% more business to be exact, from me and from my referrals.

A few weeks ago, I needed to call customer service at a major financial services firm. Like many of you, I was dreading having to even make the call. Why? Long automated menu selection, not even having the option that I need to select, then having to figure out how to get a “live” person, and then going into another “queue” that informs me I am calling at a high volume time and my anticipated wait time is five plus minutes.

“Really?!”

Then, after the wait, I finally talk to a service person, only to get the wrong information. I had to call back two more times (and yes, go through the queue again) before I received the correct procedure.

I certainly shared my experience on the satisfaction survey I received the next day. I guess it is no surprise that no one has acknowledged the poor service or tried to assure me that they want me to have a better experience next time.

How many calls come into the typical customer service center on a daily basis? 1,000 plus! The way I see it, a firm gets 1,000 plus opportunities to build and strengthen client relationships.

If you are relying only on customer surveys to gain intelligence on how to create a unique customer experience rather than learning how to customize communication styles, you will be left behind by the competition.

To provide unique customer experiences from the very beginning, you need the right behavioral information at your fingertips. So bring the solution to your firm so you can say with confidence: we treat you like you’d treat you.

About the author:

Peggy Mengel – Senior Consultant, Human Behavior Solutions Advisor

Peggy Mengel has spent 30 years helping financial services firms build deeper, stronger and more trusting client and employee relationships. With an understanding people before numbers approach. Peggy helps you navigate the human differences in your business to create sustained success. Armed with behavioral intelligence, you will be able to attract and retain the right clients, empower your team for authentic productivity, and enjoy a 23% boost in revenues. Read more

Managing Difficult Conversation during Performance Appraisal Feedback

Managing Difficult Conversation during Performance Appraisal Feedback

Janet heads up a team of fifteen sales representatives who sell technology solutions in the financial services industry. She is preparing to have a difficult conversation with one of those sales people whose performance has slipped significantly. This will be Janet’s first appraisal with Nicky, a popular, and well-liked member of the sales team. As Janet prepares for the meeting she knows that a foundational premise to the exchange will be to speak candidly. She believes the important first step is to set out all of the issues with a view to having a conversation, finding a resolution and setting out a plan to go forward.

Four Primary Communication Styles Graph

By nature, Janet is driven to reach goals, very competitive, confident and in exercising initiative makes things happen. Janet is currently under pressure as the expected sales levels have not been reached by the team. Nicky is considered to play a key role in delivering sales, but this has not been reflected in the current numbers.

Nicky openly expresses her views; she is engaging and communicates with enthusiasm. Nicky is a ‘glass half full’ person often promising much that doesn’t actually get delivered. She is popular and builds networks with ease.

The most challenging part of the conversation for Janet will be to tie Nicky down to explaining why sales are falling. Janet needs the meeting to accomplish something if only to explain the current downturn. In addition, she wants there to be a specific agreement about what will be done, by whom, and when it will be completed.

As soon as Nicky enters the meeting room she dominates the conversation by passionately recounting an opportunity that she was currently working on. The more Janet tries to pull the conversation back on track the more Nicky regales with stories about what she would be working on and the opportunities in the pipeline. At this point, Janet found herself retreating (in her mind) against this barrage of chatter.

Her intention to obtain mutual understanding with Nicky that something has to be done to improve performance and close the performance gap was fading. Janet’s plan to provide a clear message to Nicky that she wanted her to succeed, and that she was there to assist, fell by the wayside. Janet’s frustration rose to a level where she assertively told Nicky to stop talking and listen. Janet then continued the meeting assuming control. Janet laid out the sales issues firmly and with little consideration to the impact of her now firm voice.

Had Janet, as the leader, known how to re-focus Nicky and keep her on track she would have achieved her desired outcome. Instead, Nicky closed down; her confidence seemed to fade immediately; she had hoped to gain Janet’s approval but instead felt herself becoming emotional.

The reality of the situation is that both Janet and Nicky were operating from their natural zone, and they did not have the awareness to adapt. As the leader Janet realized that the performance appraisal was not going well and that there was a real risk of Nicky’s performance slipping further due to lack of self-confidence. Then Janet recalled that when applying for this current role her executive search consultant asked her to complete the Communication DNA Discovery Process which identified her communication style as being direct. She realized that if before the conversation or even as she was preparing for the performance appraisal meeting Nicky had also completed her Communication DNA then the result of the difficult conversation could have been different. Janet would have seen the benefits of giving Nicky time to be exuberant with her stories and further, understood how to keep her on track so they could have a mutually beneficial exchange.

 

 Lifestyle Communication DNA Style

  1. Keep to an overview of the strategy and not too much detail
  2. Smile a lot and keep an upbeat, positive tone
  3. Have meetings in a relaxed environment, and allow more time
  4. Let them talk openly but keep on track
  5. Address their lifestyle goals
  6. Provide clean and simple graphics to invoke emotions (fewer words)
  7. Talk about “spending budgets” and returns in a range
  8. Ask what their “gut feeling” is on your recommendations
  9. Make decisions interactively together and provide opinions of others
  10. Recognize them with invitations to social events

With this knowledge Janet would have discovered how to address Nicky’s more exuberant approach, acknowledge her successes, smile a lot and keep an upbeat tone which would have put Nicky at her ease for more difficult and strategic discussion to take place. Janet had wanted them to make decisions together and share opinions on how best to move forward. However, Nicky would have realized that Janet didn’t need long stories but did need meetings to be structured and with meaningful outcomes.

The performance appraisal did not go well. No conclusion was reached. Janet suggested to Nicky that they reconvene at which time Nicky should produce a plan and strategy on how best to increase sales and, in addition, bring any suggestions she might want to include to improve the sales process.

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The Missing Piece of Client Engagement

No one said it would be easy.? Our inboxes and phones are overloaded with emails, texts and voicemails. Our to do lists have grown exponentially.

So how do you create a compelling message to capture advisors attention in less than 30 seconds?

Todays advisor wants you to:

  • Know their business: what their challenges are and how to solve them
  • Communicate on their terms: understand them at a deeper level to engage them

But heres your challenge.? You can know their business but if you dont communicate your message in the advisors style, your message is lost. Translation: NO SALE.

Lets look at an example.

Paul Roth is a top advisor and you have the perfect annuity for him to add to his clients portfolio.? His communication style is Lifestyle which means he likes the big picture, enjoys being around people, talkative and always upbeat.

Your marketing department just emailed him The Top 10 Best Annuities (of course, your annuity is #1). Paul opens the email and all he sees are your logo and lots of words.? He immediately deletes it. Why? He prefers bullet points and pictures.? All of your cleverly crafted words and details of your #1 ranked annuity did not even register with him!

Your internal sales desk is part of this campaign so shortly after the email is delivered, they begin making the calls to get advisors educated and excited about this product.? Paul is in Rons territory, so he jumps on the phone to Paul.? He takes the call because he knows Ron and your firm.? Rons communication style is Information so she starts the conversation by giving Paul all the pertinent facts and is proud of it because he knows the advisors business!

What he doesnt know is that Paul stopped listening within a minute.? Why?? Because Paul wants someone to set the big picture context first and then talk about how other advisors are using it. ?Details of the product offering are secondary to Paul so hewilleither ask the questions later or look it up online.? But Paul is polite, thanks Ron for calling and ends the call. Ron feels positive about the call and he continues on with the rest of his calls with the same script.

Now lets move to the other integral part of this campaign: the external wholesaler.? Luckily, Jennifers communication style is Lifestyle so she presents the annuity to Paul in exactly the way that appeals to Paul. He now understands the annuity, how it differs from the competitors and how to position it in the clients portfolio. SALE IS MADE!

But what if Jennifer wasnt the same communication style?? The three-pronged marketing campaign to promote your #1 ranked annuity would fail on more than half of the advisors. Not because you dont have a good product but simply because you havent customized your message.

Still thinking the soft side of big data doesnt produce revenue?

Maybe now is the time to take a look at a behavioral marketing system that can make a big difference in the effectiveness of your marketing campaigns.