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Investors Eat the Behavior of Advisors

When discussing financial planning issues, there is so much talk about investor behavior. However, rarely does the discussion get to the advisors behavior. Our recent whitepaper: Dealing with Financial Planning Risk ? Directing Portfolio Decisions or Navigating Human Behavior opens up the discussion on the importance of advisor behavior as the advisor is the behavioral guide of the client.

Have you ever considered how much the advisors behavior impacts the investor’s performance? The reality is that advisors are human as well. They have strengths and struggles which impact their decision-making and how they respond to the financial markets. Even more important is that advisors need to realize that their behavioral style could be different to that of the clients, and therefore they have to be aware of what this means. ?You can also learn more by visiting the following blog by Samantha Allen:? http://www.financial-planning.com/blogs/Forget-Investor-Behavior-What-About-Advisor-Behavior-2681735-1.html

Research shows that some advisors themselves have a myopic loss aversion resulting in extreme caution. Then there are other advisors who have extreme over confidence and can be blinded about the potential dangers of the strategy they have recommended. There are also advisors who just get stuck in their own strategy because that is what they know and believe in but do not know how or when to adjust. Ultimately, the problem can become that the clients portfolio starts looking like the advisor.

Our experience has also been that if the advisor has high levels of personal awareness then they have a greater chance of managing the influence of their behavior on the clients portfolio. This ability is increased if the advisor uses an objective behavioral discovery process for themselves and the client. This will help the advisor more clearly and confidently navigate the differences.

If you take the graphic below which compares the behavioral style of Chris Coddington? as the advisor and Helen Jones as the client you can see the differences that have to be navigated.

Financial DNA Comparison Report

Chris is a driven pioneer and risk taker who will be focused on performance. But will he push Helen too far out of her Content lifestyle zone? Will Helen be able to control herself when she hears new ideas at the dinner party?

To learn about your style, complete your Financial DNA assessment and then start seeing how different you are to clients. Please visit www.financialdna.com.

If you would like to access the whitepaper: Dealing with Financial Planning Risk? – Directing Portfolio Decisions or Navigating Human Behavior“, click here.

The Outgoing People Connector

This post is part 4 of our 10 part series on Financial Behavioral Insights from our Financial Performance in the New Behavioral Economy White Paper. The financial behavior insights will help you gain greater self-awareness for recognizing some of your own behavioral tendencies and also those of investors.

Behavioral Insight 4: The Outgoing People Connector

Helen Jones is a 38-year-old mother of 3 children who has a very bubbly, outgoing personality and an active social and community life. Helen openly admits that she has gone to lunch and dinner parties and hears the latest hot tips on what stocks are going up. Often in the excitement of the moment Helen has taken a few bets. She justifies to herself that it will fund a vacation, or this will mean she can have some nicer clothes. However, after a few years of much heavier losses than gains, and the future of her family on the line, Helen realizes something is wrong. Outside help is needed.

Behavioral Insight
Naturally expressive and talkative people will be Engagers who are Outgoing People Connectors. They are able to network with people well but may make uneducated bets from following the herd that sabotage their portfolio.

Communication key: Tell them the names of the people who are involved in the company and management of the investment.

Helen is clearly an Engager with the dominant trait of being an Outgoing People Connector. This means she is constantly networking with others and always exposed to the latest idea or solution.? The Outgoing People Connector will usually be the expressive and talkative type who enjoys mixing with people.

When these networking talents are used well the Engager who is an Outgoing People Connector will learn of some great ideas. The key will be using the ideas wisely. However, often this type of person is quite impressionable regarding what others have to say and will display a herd mentality. We all know that there are people who pick up the latest money-making idea at a dinner party. Everyone else is jumping into a deal; why shouldnt I? Or one of their friends is talking about a hot stock tip.

Further, a struggle for these Engagers who are Outgoing People Connectors is that they are often quite emotionally vulnerable, and they have a desire for instant gratification. So this leads to impulsive decision-making and later regret. While they create the perception of being risk takers, very often they are not. Usually, the quick leap into an investment is matched by a quick leap out with great wealth destruction consequences.

An advisor who is an Engager with the primary trait of being an Outgoing People Connector will be naturally strong at finding out from others what the new opportunities are. However, they need to restrain themselves and only present these opportunities to clients when they have thoroughly researched them. Otherwise, their clients will each have a portfolio with a mix of poor investments.

Learning Point:
The advisor needs to be aware that the Engager who is an Outgoing People Connector will be responding to a lot of up and down emotions with every investment opportunity, and therefore each one needs to be discussed so that wise decisions are made. Ask the client: Tell me who you consult with to get investment ideas? How do you check the opportunities that are presented to you and who is presenting them?

What are your thoughts? For additional information on discovery through behavioral profiles, click here.

The advisor needs to be aware that the Engager who is an Outgoing People Connector will be responding to a lot of up and down emotions with every investment opportunity, and therefore each one needs to be discussed so that wise decisions are made. Ask the client: Tell me who you consult with tNaturally expressive and talkative people will be Engagers who are Outgoing People Connectors. They are able to network with people well but may make uneducated bets from following the herd that sabotage their portfolio.
Communication key: Tell them the names of the people who are involved in the company and management of the investment.
o get investment ideas? How do you check the opportunities that are presented to you and who is presenting them?

The Take-Charge Visionary

This post is part one of our series on Financial Behavioral Insights from our Financial Performance in the New Behavioral Economy White Paper. The financial behavior insights will help you gain greater self-awareness for recognizing some of your own behavioral tendencies and also those of investors.

The Take-Charge Visionary

Behavioral Insight 3, Take charge investors, investor behaviorJack Sun is a 40-year-old driven businessman who has come to meet with you to discuss his finances. You have learned that Jack has just sold one of his businesses and he now has capital to re-invest. You ask Jack the question: What will your life be like in 3, 5 or 20 years? Jack is able to immediately respond that he loves running restaurants and managing people. As the discussion goes on it becomes obvious Jack has worked out his life plan and he will not be retiring. Further, he does not mind what he invests his investment capital in so long as it makes money. He says he is interested in the overall return and not the performance of any particular asset.

Jack is an Initiator with a dominant trait of being a Take-Charge Visionary. This means he is naturally a big-picture thinker. He can see his life out a long way. Being able to more easily get the big-picture clarity does mean he will be naturally more comfortable making long term investment plans. Further, this clarity will help Jack with being able to more confidently make financial choices.

Also, when it comes to managing investments, an Initiator with Take-Charge Visionary traits will be able to more easily look at their investment portfolio in the aggregate. This will generally help them focus on the overall result and not get stuck on looking at whether each particular investment is a winner or loser.

Behavioral Insight
Naturally big-picture thinkers and decisive people will be Initiators who are Take-Charge Visionaries. They know where they are going and will have a consolidated view of their investment portfolio.

Communication key: Keep the discussion high level and provide options on recommendations.

A struggle that an Initiator will have is listening to advice from an advisor because it is about their agenda and plans. This means they could miss learning important information before making a decision and over extend themself.

An advisor who is an Initiator with Take-Charge Visionary traits will be naturally good at giving the client direction but needs to slow it down and listen to what their client has to say. This type of advisor needs to be very careful that their dominant attitudes do not overly influence the portfolio.

Learning Point:
The Initiator with a Take-Charge Visionary dominant trait will more independently set the direction of their overall planning. The advisor should aim to guide them by providing options and recommendations on investment choices. Ask the client: What goals would be the most important for you to achieve in your life? Have you built a detailed plan for your wealth creation?

To read about additional client behavioral styles, download the full Financial Performance in the New Behavioral Economy White Paper.

What are your thoughts?

Advisors Creating Lasting Value With Customized Experiences

An article by James Fennessy in the Australian Banking and Finance magazine on March 10, 2011 highlights a key challenge for financial advisors. That is delivering value to their clients and getting paid for it. How do advisors demonstrate the trust in their advice to get paid for it?http://www.dnabehavior.com/AdvisorClient-small-280.jpg The article points out that the cost of a financial plan is around $2500 however consumers only value them at $300. This is a large gap. The other key point that the article does not say is that based on Dalbar studies investors do far worse when they self manage their investments. So, can investors want to have their cake and it too? So, financial planning does need to get to the place where there is trust and value offered. Importantly, if investors want the proper service they will have to pay a fair fee. No different than going to any other professional.

The starting point for this change is with the advisors offering a service that creates greater longer term value and trust. They will need to have deeper conversations that address the clients life and values. The service must go beyond investments as that is a commodity. The advisor must learn to build a customized experience for each client based on the clients unique personality. The client must be recognized and valued for who they are, and not their money. Importantly, the planning process must allow for the client to be guided through it so they are personally involved in every step. Then the value will be felt and even more trust developed. It is now up to the advisors to be trained to do this. Such training is more soft skills related. Research does show this works but advisors have to trust the process. These principles are at the core of the Financial DNA Certified Wealth Mentor Program.

Click here to read the full article.

Click here to learn more about the Financial DNA Certified Wealth Mentor Program.

Advisors Creating Lasting Value With Customized Experiences

An article by James Fennessy in the Australian Banking and Finance magazine on March 10, 2011 highlights a key challenge for financial advisors. That is delivering value to their clients and getting paid for it. How do advisors demonstrate the trust in their advice to get paid for it? The article points out that the cost of a financial plan is around $2500 however consumers only value them at $300. This is a large gap. The other key point that the article does not say is that based on Dalbar studies investors do far worse when they self manage their investments. So, can investors want to have their cake and it too? So, financial planning does need to get to the place where there is trust and value offered. Importantly, if investors want the proper service they will have to pay a fair fee. No different than going to any other professional.

The starting point for this change is with the advisors offering a service that creates greater longer term value and trust. They will need to have deeper conversations that address the clients life and values. The service must go beyond investments as that is a commodity. The advisor must learn to build a customized experience for each client based on the clients unique personality. The client must be recognized and valued for who they are, and not their money. Importantly, the planning process must allow for the client to be guided through it so they are personally involved in every step. Then the value will be felt and even more trust developed. It is now up to the advisors to be trained to do this. Such training is more soft skills related. Research does show this works but advisors have to trust the process. These principles are at the core of the Financial DNA Certified Wealth Mentor Program.

The Skeptical Questioner

This post is part 7 of our 10 part series on Financial Behavioral Insights from our Financial Planning Performance in the New Behavioral Economy White Paper. The financial behavior insights will help you gain greater self-awareness for recognizing some of your own behavioral tendencies and also those of investors.

Behavioral Insight 7: Skeptical Questioner

Peter Madden is 67 years old and recently retired from his chief executive role for a Fortune 1000 company. He has been around financial professionals a long time and always sees them as being out for themselves and not him. Further, he has been watching the market himself now with a Bloomberg screen in the home office. Peter thinks he can outwit the market and get in low and out high. In Peters mind, what do advisors know? Most of them do not have as much money as I do. So, he says, Why should I delegate to an advisor?
Financial Planning insights, financial advisor client, client communication styles, client behavior

Behavioral Insight
Naturally guarded and wary people will be Skeptical Questioners who seek to remain in control of their portfolio but do not easily delegate to advisors.
Communication key: Provide logical explanations and the key points in a straightforward manner.

JPeter is a Skeptical Questioner and better known as a do it yourself investor. Typically, these investors by nature will be very investigative and are independent decision-makers. You will often recognize these investors by the fact that they are very guarded in what they say and yet ask a lot of questions and expect plenty of information. Also, very often the Skeptical Questioners mindset will be that they have the capability to invest better than the professionals. However, the good news is that these investors will take responsibility for the choices that they do make.

The struggle for Skeptical Questioners is learning that they will be the ones who are in the way of their own success. They will be prone to trying to time the market and always believe they can control the outcome. The Skeptical Questioner will not find it easy to delegate to an advisor who can show them how to achieve market returns through a well-diversified portfolio. This will come only after making a lot of mistakes and realizing that they do need help. If, for some reason, they do delegate to an advisor, then watch them take back control when the expected results have not been achieved. Therefore, by trusting no one, then they cannot be really helped, regardless of their knowledge level.

Advisors who are Skeptical Questioners have the natural strength that they will be highly questioning of all information that is provided to them and check all representations made out. However, because they are by nature quite controlling and closed they will find it difficult to build trust with their clients. They will only ever be comfortable when the client completely delegates to them.

Learning Point:

The Skeptical Questioner needs the advisor to play the role of an experienced sounding board that is capable of asking insightful and wise questions to challenge their decisions. The advisor needs to learn they have to wait before being allowed into their inner world. Ask the client: How could you empower your advisors to more effectively help you? In what ways have you got in the way of your own success?

What are your thoughts? For additional information on discovery through behavioral profiles, click here.

 

The Spontaneous Intuitive

This post is part 6 of our 10 part series on Financial Behavioral Insights from our Financial Planning Performance in the New Behavioral Economy White Paper. The financial behavior insights will help you gain greater self-awareness for recognizing some of your own behavioral tendencies and also those of investors.

Behavioral Insight 6: Spontaneous Intuitive

Jenny, 48, has been investing for some years now based on her gut feel of what she thinks is going on in the economy and the behavior of the markets. She has a clear idea of what she wants out of life, is confident in her abilities and is quite happy making investment decisions based on what feels right. Jenny by nature does not like reading a lot of research. Just some graphs, illustrations and a few bullet points are enough for her. For Jenny too much analysis gets in the way. She feels too many plans will lock her in and opportunities may be missed.
Financial Planning insights, financial advisor client, client communication styles, client behavior

Behavioral Insight
A naturally instinctive and flexible person with a clear vision will be a Spontaneous Intuitive who is confident with the financial decisions they make but can be impulsive.
Communication key: Provide the broad facts and encourage them to discuss their thinking out loud.

Jenny is the Spontaneous Intuitive who will generally be flexible enough to take opportunities when they are there and not get stuck in over-analysis. This type of person will usually make very confident decisions unless he or she has experienced a very negative event. The key is that they need to have enough prior investment experience to intuitively know that their gut feeling is right. Once a decision is made, a Spontaneous Intuitive will run with it and not look back. They will have a strong sense that things will work out.

The struggle for them is not to be too overconfident in their abilities and make rash decisions that they find out later were poor. The poor decisions can come from insufficient research and also not taking time out for listening to others.

The other dimension a Spontaneous Intuitive must address is that because of their flexible nature they may end up with an unstructured investment portfolio. The portfolio will reflect no attention to asset allocation, appropriate risk weighting or diversification. This is not to say they will be failing, either. Nevertheless, they could suffer from overconfidence and take some big chances that are not well thought out.

An advisor who is a Spontaneous Intuitive will be strong at adapting to changing circumstances and making instinctive decisions. However, these types of advisors need to ensure they have access to solid research to support their recommendations. Also, they need to provide enough for structure for clients and set appropriate boundaries.

Learning Point:

The Spontaneous Intuitive client needs the advisor to provide objective analysis to validate their intuitive feel. The advisor should not allow the Spontaneous Intuitive client to become too over confident in their abilities and make impulsive decisions. Ask the client: Tell me about the best financial decision you made? How do you set boundaries in your life and financial decision-making?

What are your thoughts? For additional information on discovery through behavioral profiles, click here.