This article first appeared on Nasdaq.
Understanding how to uniquely manage each client during periods of market volatility is a major issue for advisory firms. So, when you have the capability to predict each client’s reactions in advance of market movements, communication is straightforward, understanding that markets are not predictable, but human behavior is. After all, mismanaged emotions destroy wealth.
In a down market, some cautious clients will panic about losses. On the other side, more extreme risk-takers will see it as an opportunity to buy. Prioritizing the management of clients based on market fear (or lack thereof) and providing corresponding key insights will develop more effective client relationships and retention.
Research demonstrates that markets cannot be predicted by advisors and investors. Instead, advisors should manage the behavioral biases of their clients. In fact, advisors are in an optimal position to do so.
Check yourself before you wreck yourself: Clients need to be part of the discovery process from the outset. This can only be achieved using highly targeted questions via an online discovery process, or verbally. Afterward, advisors can deliver advice based on the client’s goals, rather than the advisor’s perception or interpretation of client needs.
This leaves the advisor better able to align solutions and offerings to who the client is and what they are trying to achieve. It takes the advisors biases out of the conversation. Whether they are the personality biases or personal financial biases, the advice now becomes all about the client. Discovery upfront, as outlined here, delivers both a filtering and alignment that provides greater objectivity on the part of the client and advisor.
Understanding and managing clients during market volatility is all about their emotional balance. If they are to achieve their goals, its important for the advisor to know how to stop them making silly decisions on their journey via emotion-based decisions or reactions to market movements.
This is where behavioral coaching and educating becomes such a big part of what advisors should be offering clients. Not every advisor, though, is going to have the skills necessary to coach clients in this way.
The use of a highly-validated discovery process that identifies and measures both inherent and learned behaviors will make advisors aware of clients who will react emotionally to triggers like disturbing media headlines or presidential tweets. Advisors with concrete insight can then best manage the client and their reactions for the best outcomes.
Having this insight on clients financial personalities delivers a more sophisticated set of tools into the hands of advisors.
Understanding the wiring and the whys
We humans have certain decision-making biases that are hard-wired early in life. These behavioral biases can be predicted, as they are inherently part of our DNA. The biases usually reveal themselves in times of higher market volatility, when a person is under more pressure or when a major life event takes place.
The key for investors is not to churn their accounts too much in times of volatility. For some advisors and investors whose DNA is wired to be fast-paced, overtrading will be a greater temptation.
As an investor, it’s important to know how much your account is actively managed. Active management can equate to overtrading and, in the end, could be costly or even destructive if not properly moderated.
The other bias to recognize is that investors have a much greater aversion to losses than gains. Those investors whose DNA is wired to be patient and risk-averse will feel the pain of losses much more; so, managing their emotions in times of volatility is crucial. These clients will need a portfolio that is very different from those that are higher risk-takers.
Advisors need to learn how to advise and communicate with each client uniquely in terms of their reaction to market volatility. Again, this is why advisors should consider using sophisticated, targeted questioning to gain insights into client behavior. Having predictive behavioral insight at the start of the client/advisor relationship is significant.
A customer-centric approach in all service industries is essential. But with the scrutiny and attention placed on the financial services sector, such customer focus becomes crucial to the reputation of the business, to client retention and to the overall success of the business. Further, it is a regulatory requirement.
Advice must now be tailored to the individual. One size does not fit all. Advisors who don’t get on board in terms of understanding the behaviors of their clients risk compromising their business and leaving themselves wide open to litigation.
Advisors no longer just need to know how they need to know why. Do you #KnowTheWhy of your client’s life and wealth creation goals?