Financial Personality

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Today I’m Going to be an Entrepreneur!

 

DNA blog

Yes, there are times individuals wake up with an amazing idea and are convinced they are the next Sir Richard Branson, Bill Gates or Mark Zuckerberg. They persuade themselves that they are an entrepreneur. They may even attract investment for their idea. The market might be excited by this new offering BUT the truth is that most entrepreneurs fail to get their businesses off the ground. Even if they do, building and sustaining a successful business is rare.

The 2015 US Census Bureau reports that 400,000 new businesses are started every year in the USA but that 470,000 are dying, a worrying statistic.

John Chambers, Cisco’s CEO of 20 years, says this – More than one-third of businesses today will not survive the next 10 years. Shikhar Ghos, in his recent Harvard University study, claimed that three out of every four venture-backed firms fail.

The strengths that make people entrepreneurs are counterbalanced by struggles that can get in the way of success. Without this self-understanding, decisions will be made that can cause the enterprises to fail.

Much research exists now to confirm that entrepreneurs are born and not made. Having conducted extensive research to validate these findings, DNA Behavior International has identified the top five (5) genetic traits that are to be found in entrepreneurs.

  1. Resilience (Measured by the Fast-Paced trait) – they achieve results, manage setbacks and rationally take quick action.
  2. Risk Taker (Measured by the Risk trait) – confidently take risks and tolerant of losses.
  3. Creativity (Measured by the Creative trait) – innovative with ideas and seeks to differentiate.
  4. Work Ethic and Focus (Measured by the Pioneering trait) – pursues goals and is often ambitious and competitive.
  5. Charisma (Measured by the Outgoing trait) – outgoing, connects with a lot of people and influences people to follow them.

Having these genetic traits does not guarantee success for entrepreneurs. Learning to be behaviourally smart in using the powerful genetic ingredients they were born with is more likely to deliver success.

Of the 5 identified entrepreneurial traits listed above – resilience leads the pack. Building a business, handling the enormous pressure of setbacks, rejection of ideas, sustaining a business, managing staff, and dealing with market expectations, will never be plain sailing. If you are ever to see blue water, understanding the importance of resilience is a key factor.

Through their DNA Behavior Natural Discovery Process, the entrepreneurial genetic traits can be measured. The graphic below highlights, in order of strength, from the top down the behavioral factors (genes) which an entrepreneur exhibits:

FactorsPerformance

 

The resilience gene is measured by the fast-paced trait. When this trait measures more than 55 – results will be achieved, setbacks will be managed and the individual will be able to rationally take quick action in any given circumstance.

Success in business is rarely about how many challenges you face so much as it is a matter of how you respond to the challenges. Entrepreneurs who are behaviorally smart, and understand their personality and genetic makeup, will have a level of resilience which allows them to face an almost constant barrage of challenges without ever weakening their resolve or losing their passion.

Interestingly the DNA Behavior Research program found that when comparing entrepreneurs who had built a $10 million turnover business as against a $1 million turnover business, that all the key DNA factors do not measure differences in an overall sense, but they do measure stronger.

Do you see yourself as an entrepreneur? Are you heading up a business you founded? Have you taken over a family business? Whatever the situation that brought you to this season of life, if you don’t know your entrepreneurial traits and understand how to manage them, and perhaps more importantly, how to fill the gaps in your talent, you may be heading for the failure statistic graveyard.

To learn more, please speak with one of our DNA Behavior Specialists (LiveChat), email inquiries@dnabehavior.com, or visit DNA Behavior

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Solving The Dangerous Voids in Risk Profiling

No doubt, intense discussions surrounding risk tolerance and behavioral finance are on the rise. Michael Kitces, who writes the Nerds Eye View Blog, has written a very good summary on the state of play regarding risk tolerance questionnaires in his article: The Sorry State of Risk Profiling Questionnaires for Advisors.

Michael articulates various risk factors in distinguishing between tolerance, capacity and perception. Likewise, for advisors using Financial DNA, addressing the differences between tolerance, capacity and perception is very clear. And these users are provided with the structured framework in which to do it.

Then there is how the risk profile is used. In goals-based planning, where the client has a portfolio designed to achieve buckets of goals, there may be multiple risk profiles. Given that there are different goals, the risk tolerance of the client must be known and the framework outlined and applied.

Many advisors believe that risk tolerance can be determined by observation or casual interaction. However, these methods are neither objective nor validated. Relying on the advisor’s perception of the client under preset circumstances (in a comfortable office or out for a meal) opens the door to a myriad of pitfalls. The advisor is influenced by their own risk profile and biases, which removes objectivity. The client, while self-reporting, may not be faced with the pressures of considering a volatile market or other life-changing event, which would alter decision making or goal-setting, again removing objectivity from the equation. Also, not using a validated psychometric risk profiling process means that the advisor does not have a consistent process for handling the risk conversation with the client. This further leads to discolored results, and not just for a given client, but across the entire firm.

While current regulations do not specify that a validated psychometric process must be used, it is the direction in which we’re headed. If the firm wants to have a robust process of mitigating client complaints and maintaining compliance, these tools provide the solution. Plus, as Kitces points out, it is not just the tool itself, but also the planner’s behavior and skill in deploying the tool that is important.

Conversely, some advisors state that they do not wish to bother a client with more paperwork, so they do not have them complete a risk questionnaire. But experience shows that the addition helps keep the focus client centered during the planning process, plus the client feels more engaged because they’ve participated at a higher level. So it becomes a service quality enhancement, which deepens the advisor / client relationship and ultimately leads to greater revenue.

Next, the discussion turns to the design of the actual risk tolerance questionnaire – “right data in, right data out”. Kitces is right (as is Plan Plus), most tools are inherently flawed for many reasons, and many purport to be something they are not. The questionnaire structure is important to the outcome, and must follow an accepted psychometric model.

Our view is that all of the risk profiles (even the validated ones) use situational based questions – that is, the client could respond to the questions differently depending on any one (or combination of) market or personal events, attitudes, feelings, perceptions, education etc. While this template provides a basic baseline profile, it does not provide the most accurate or effective insights as to the emotional state of a client. Daniel Kahneman, psychologist known for his extensive work in behavioral finance and decision making, details our “Level 1″ automatic decision-making style as when we are under pressure or how our baseline, “hard-wired” instincts will drive decision-making. So unless a clients (or your own) Level 1 style is known, it is impossible to build a long-term portfolio, as it will be emotionally incompatible. So the questionnaire has to be designed to uncover this Level 1 behavior – free from personal or situational bias. The Financial DNA design does just this and the validated results are accurate and constant over time.

Whats missed in all of this is risk tolerance being only 1 dimension of a clients financial personality. There are several more factors to consider within the broader field of behavioral finance in order to fully understand the decision-making biases of both the client and advisor. Not communicating these biases only creates more risk to the client / advisor relationship, decision-making, goal-setting and overall compliance. So, the risk discussion is not complete without knowing the clients full set of behavioral biases and knowing how to communicate on the client’s terms. And this is why it is so important that the questionnaire design must be objective, robust and validated.

One thing for sure is, the regulatory process will not go backwards. And in today’s competitive and complex world, costly client complaints will not go away. But, on the positive side, those advisors who are investing in building client centered and compliant processes have the upper hand. So, invest in a stronger “Know Your Client” process, as what is good for the client will be much better for the advisor and firm too.

 

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Avoid Irrelevance- Reinvent Your Financial Practice

5 Tips To Managing Your Advisor’s Behavioral Bias

So what exactly is Behavior Bias?
And can it be avoided?

Yes, Behavioral Bias can be mitigated, it’s just a matter of developing Financial EQ through behavioral awareness.

Good questions for Investors to ask and answer:

  • Why do some Advisors repeatedly lose wealth and others accumulate it?
  • Why, after developing investment goals, do some advisors then revert to knee-jerk reactions that may hurt returns?
  • Is there more to advisors than just analyzing numbers and making decisions to buy and sell various assets and securities?
  • How aware of their own behavioral biases are advisors? How aware are you, as an investor, of yours?

Behavior Bias is when we let emotions or our biases get in the way of smart financial decisions. In other words, it’s the gap between what we know we ought to do and what we actually do especially under pressure or in the face of uncertain markets.
For advisors to be successful, they need to be able to manage their “emotional reflex system” when volatile events happen. They can’t control the markets, but they can manage their reaction to them. And the same goes for how they engage you, their client.

Also, behavioral bias doesn’t apply only to advisors. As an investor, you’re equally likely to be caught unaware. Your thinking and actions are influenced by the same set of factors and biases that affect advisors in their financial decision-making process.

Qualities such as investing time into building relationships to build trust will help keep advisors from making personal investment mistakes. However, using a highly validated discovery process with your advisor will reveal decision-making behavior, immediately. Further, it helps uncover your own goals and priorities.

5 Tips To Managing Your Advisors Behavioral Bias

Source:

According to Carl Richards in his book The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money’:

“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.”

Simply put, the 5 tips to managing (you and) your advisor’s behavioral bias:

1. Acknowledge behavioral biases are inherent to everyone.

- identify emotional triggers, the inherent go to’ decision-making process, under pressure.

2. Never assume’ that you are not biased.

- as an investor, (driven by reputation, compensation, building a business, or managing expectations) you will make different decisions under pressure than when in a learned, calm, logical train of thought.

3. Keep your goals and financial capacity in focus-the big picture.

- this path to success will keep knee-jerk reactions from disrupting progress.

4. Everyone has an inherent hard-wired behavioral style, which is the core of who they are, and emotional reactions can be predicted, with the right tools.

5. Communication is the key.

- you must understand how to uncover a someone’s unique communication and learning style.
- Matching styles will close gaps in communicating.

Behavioral psychologists have long understood that people are not entirely rational. We’re influenced by a range of factors, from emotion to inherent behavioral biases, which make a less rational choice seem more appealing. If investors are to understand the behavior gap that will exist both for them and their advisors they need to learn about behavioral biases and other irrational behavior. Gaining this insight will deliver more effective and informed decision-making, which will stand up under market pressure.

5 Tips for Behaviorally Driven Goals-Based Planning

5 Tips for Behaviorally Driven Goals-Based Planning

Times continue to change for financial advisors. Investor fears, lack of confidence and market uncertainty are provoking clients to demand better, more personalized advice from their advisors.

Financial advisors who have moved to a behaviorally driven goals-based planning process will be the winners.

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Since the global financial crisis and recession, clients are driving the industry.

The Client:

1. Unique; each has different wants and needs.
2. Each having cognitive biases, emotions, fears, anxieties, greed and excitement.
3. Thinks they are better informed in taking control of their finances.

And advisors are struggling to navigate client’s emotions, inconsistent thoughts, and biases while maintaining control of the advisory process.

The Financial Advisor:

1. Trying to understand client’s behavior and emotional decision making.
2. Engaging to uncover and understand a client’s life goals.
3. Applying an understanding of client behavior to their investment style.

So how can firms develop a scalable framework and service model for financial advisors to address the unique wants and needs of individual investors?

Goals based Planning, based on the following 5 step process.

1. Use a trusted financial behavioral process to uncover:

a. Client’s inherent approach to finances and wealth creation
b. Biases, that get in the way of solid decision-making
c. Quality Life Goals, like retirement and family wealth transfer

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2. Outcomes from the behavioral process to build a goal based plan that is clear and precise:

a. Enable both client and advisor to have a clearer understanding of the goals
b. Identify, for the advisor, the client’s likelihood of achieving the goals and then enable measurable steps to be added.
c. Goals set relative to feasibility and other life and family priorities.

3. Create measurable checks and balances to:

a. Articulate a vision for wealth creation
b. Understand how bias and emotion might impact their decision-making
c. Be accountable even when markets are unpredictable

4. To add further value to the advisory process, Financial advisors should also complete the behavioral process.

a. The advisors own naturally ingrained biases will be revealed and can be managed.
b. Produce long-term relationships with clients when matching character traits and communication styles.
c. Advice given based on life plans and dreams, rather than by pure performance of investments.

5. Deliver a greater level of communication and a deeper trust will be built.

a. Meetings are more effective with the focus on achieving goals as a way to increasing wealth and achieving quality of life.
b. Turbulent markets are easily navigated with awareness of how the client will respond and then, how to communicate accordingly.
c. Linking financial personality with communication style will deliver a significant step forward in the way of financial planning.

Developing goal-based plans is not a new concept. However, linking it with the key foundational process of uncovering inherent behaviors is. The two approaches together will deliver not only a more effective outcome for the client but will be an industry differentiator for the advisor.

Investors get into trouble for one reason! They make bad decisions

Investors Get Into Trouble for One Reason! They Make Bad Decisions

But here’s the rub – how many investors actually learn from their past mistakes? How many don’t realize that their bad decisions come from ingrained behavioral biases? If you don’t know you have behavioral biases, then keep on keeping on making poor decisions. Because what you don’t know, is what’s hurting you.

Behaviorally Smart investors know their propensity for rushing through their natural behavior when under pressure. They’re keenly aware of their knee-jerk reaction to unsteady markets or the latest, greatest bandwagon opportunity. They know the danger in not taking a breath – to check themselves before they wreck themselves - or seek outside counsel before deciding on a major investment opportunity. Conversely, investors who do not have this insight will continue to get into trouble and make bad decisions.

When investors allow emotions to invade investment decisions, they’re set to fail. However, developing an understanding of how we inherently react to market volatility or investment opportunities will lead to becoming a Behaviorally Smart decision maker.

In his book, Behaviorally Smart Financial Planning, Hugh Massie makes the following observation:

Very often, without a heightened level of personal awareness, investor’s blind-spots can lead to investing behavior that results in sub-par outcomes
He continues by explaining the two levels of distinctive thinking which drive:

How the mind works inherently in its natural state to instinctively make financial decisions based on natural DNA “hard-wiring”. This behavior reflects the automatic biases which consistently reveal themselves throughout life (“System 1″)

How the conscious thinking evolved through circumstances, experiences, education and values situationally influence financial preferences at different times in the course of life. This is learned behavior which generally reveals itself as a result of behavioral management (“System 2″).

Emotion and psychology affect every decision we make and investing is no different.
It’s true to say that most investors revel in the process of creating wealth, but pay little or no attention to managing it or themselves. Without understanding behavioral biases, investing becomes a lottery and any gains are held for ransom by the investor’s own ignorance.

Don’t allow blind spots in your own behavior to highjack important decisions you will make in life. Change course by learning about your inherent behavioral biases and how to mitigate their affects on your decision-making capabilities.
It’s not rocket science – just four easy steps:
Step 1. Make the decision to educate yourself
Step 2. Use a validated, accurate and trustworthy process such as Financial DNA to uncover your behavioral biases
Step 3. Select an advisor who not only has your best interests at heart but also has educated themselves about investor DNA and Behavioral Biases. Great advisors examine the reasons behind decisions their clients make.
Step 4. Always remember your natural, go to’ behavior when markets get rocky (as markets will).

In conclusion:
“Invest in as much of yourself as you can, you are your own biggest asset by far.” Warren Buffet
“The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.” Bertrand Russell

Duke University Professor and founder of The Center for Advanced Hindsight behavioral economist Dan Ariely.Predictably_Irrational refutes the common assumption that we behave in fundamentally rational ways. Blending everyday experience with groundbreaking research, Ariely explains how expectations, emotions, social norms, and other invisible, seemingly illogical forces skew our reasoning abilities.

“Not only do we make astonishingly simple mistakes every day, but we make the same “types” of mistakes, Ariely discovers. We consistently overpay, underestimate, and procrastinate. We fail to understand the profound effects of our emotions on what we want, and we overvalue what we already own. Yet these misguided behaviors are neither random nor senseless. They’re systematic and predictable–making us “predictably” irrational.”

As investors the financial decisions we make can be both complex and stressful; they can change our financial long term security forever. Their impact can be life changing. This is why self-education and understanding decision-making approaches in terms of why and how we make decisions need to be top priorities.

Shocking News for Investors  You and Your Financial Advisor Are Biased

Shocking News for Investors – You and Your Financial Advisor Are Biased

I can hear investors saying, “I’m not biased” – well sorry but you are! And guess what? So is your financial advisor! But, if you take time to invest in knowing your financial behavioral biases you can work very effectively with them, instead of blindly against them

Understanding behavioral finance and the effects of human behavior on financial markets provides insight into the human side of financial decision making. This insight can help investors take a more rational and less emotional view and remain committed to long-term strategies and goals during periods of market volatility.

Seth

Both investors and advisors often make incorrect judgments based on personal beliefs, past experiences, personal preferences, and emotions. These biases direct them away from rational, long-term thinking. Further, biases focus the investor or financial advisor on only one aspect of what could be a complex financial decision-making process.

Ariel Cecchi – Consultant on Behavioural Economics and Service Design University of Geneva observes the following:

A common interpretation in behavioral finance is that rationality is the result of a pure cognitive process which can be behaviorally biased. In general, the bias has a negative connotation because it produces a distortion in the calculation of an outcome. When a decision-making process is cognitively biased the outcome leads to sub-optimal results or judgment errors. Roughly speaking, the subject might make irrational choices due to faulty reasoning, statistical errors, lack of information, memory errors, and the like. Differently, when the decision is emotionally biased, it means that the cognitive process has been influenced by feelings, affects, moods, and so on (let’s label these states “emotions”). This leads us to irrational decisions or actions.

Investor

Biases are influential underpinnings in terms of the decisions we make. Such behavioral biases cannot be completely eliminated, but recognizing them is the first step in managing them, reducing their effects and avoiding self-destructive behavior.

In increasing numbers financial advisors are adopting the behavioral components of investing. They may have worked with their investors for long periods of time, focusing predominantly on risk tolerance and objectives. Not so now. Advisors are making the effort to understand why investors often react in the moment and revert to short-sighted beliefs that may hurt their returns.

Many advisors are implementing behavioral insight processes that deliver greater self-awareness for recognizing potential advisor AND investor behavioral tendencies. Tools such as ones provided by Financial DNA measure each of these behavioral biases independently and display them on a Behavioral Management Guide. This enables financial advisors to discuss the strongest biases with the client and develop a strategy for managing them.

Managing money is too important to be driven by our emotions. Running to our inherent go to’ behavior when markets fluctuate has to be managed. The responsible first step in any investor/advisory relationship, therefore, is to objectively uncover the financial personalities of both advisor AND investor, using a measurably reliable, independently validated discovery process. Anything less degrades the advisor’s fiduciary responsibility and investor experience while opening the door for compliancy issues and loss of clients.