Are You Considering More Than Just Investment Risk?

Traditionally when the topic of risk comes up financial advisors and wealth managers think of investment risk. How much loss can my clients tolerate when the market goes down? How aggressive or conservative should the investment strategy be?

Then there are advisors who have focused less on the investment side and gone to the life planning side. This too is important in the context of knowing the client and helping them achieve their goals.

However, what sits between whether the client creates and protects the wealth to achieve their goals is their behavior.

In a nutshell, there are many more risks than only the clients current investment risk tolerance that need to be known in building a long term financial plan and investment policy statement. What must also be known is the clients natural hard wired risk behaviors, their financial behaviors (eg spending and financial habits) and their relationship behaviors which if not managed can cause financial risks.

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The Reserved Reflector Client

This post is part 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 Reserved Reflector

Patricia is a project manager who works on local government system projects around Atlanta, Georgia.? She is married and has two children.? Due to the nature of her occupation she has relocated several times and she and her family have just moved into Atlanta within the past three months.? They have purchased a new home and are still getting settled.? Patricia prefers to work with a financial advisor with whom she can email and only have face-to-face meetings when necessary. Patricia is 44 years old and she spends large periods of time traveling and tied up in projects. However, she wants an advisor she can stay in touch with by sending a regular email with the key information and structure conference calls when a key issue comes up for discussion.Reserved Reflector Client

Patricia is clearly a Facilitator with the dominant trait of being a Reserved Reflector. This means she tends to keep in her own world and interact with people only when needed. The Reserved Reflector will prefer to withdraw and research information. Although, when needed they can be very effective at interacting with other people.

When these reserved and reflective talents are used well the Facilitator will be good at digesting information and focusing on the matters at hand. They will be able to put the portfolio into compartments in their mind allocating money to investments with different levels of risk. Although, the downside of this is they can make it too structured not buying and selling investments in the special purpose accounts when needed.

Behavioral Insight
Naturally focused and withdrawn people will be Facilitators who are Reserved Reflectors. They are able to think through issues well but will mentally account for their investments taking a calculated risk with that component they are prepared to lose and act with a fear of not having enough money.

Communication key: Allow them to retreat and think and do not overwhelm them with emotion around new ideas.

Further, a struggle for these Facilitators who are Reserved Reflectors is that they naturally have a fear of not having enough money for their retirement no matter how financially secure they are. This causes them to hoard their money with the result of not spending, giving or taking an investment risk when they need to. The good point is that they are unlikely to make a rash financial decision.

Learning Point:
The advisor needs to be aware that the Facilitator who is a Reserved Reflector will not always give you a lot of feedback because they are processing information. Therefore, keep clam and do not push them too hard for quick response. Further, keep their confidence up that they will have enough money in the worst case situation. Ask the client: How do you gather new information? Tell me about how comfortable you are with spending money?

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

What are your thoughts?

Financial Performance in the New Behavioral Economy White Paper

The winds of change are moving fast through the modern economy, and this includes the financial services industry. What we are seeing is the emergence of the New Behavioral Economy – where the client is king and behavioral finance is in. This means the approach to providing financial services will become client centered and will revolve around behavioral insights.

The Financial Performance in the New Behavioral Economy White Paper is a Behavioral Guide intended to serve as an introductory framework for advisors, so that they can improve the financial performance of their investor clients using validated financial behavior insights.

The Financial Performance in the New Behavioral Economy White Paper includes:

  • 10 practical demonstrations showing how advisors can apply financial behavior insights to help guide and communicate with their clients to more confidently make committed investment decisions.
  • Guidance on solutions for building the financial performance of clients including: Behavioral Profiling, building Behavioral Investment Policy Statements and Performance Reviews.
  • The Financial “Blind-Spots” Exercise for building initial self-awareness and reducing the negative impact of financial blind-spots on financial performance.

Click here to download the White Paper.

Behavioral Segmentation of Your Clients

Traditionally many advisors segment their clients based on tangible factors such as the type of service they will provide to clients (eg executives, family business, life planning etc) and assets under management minimums. There is business sense in this as it focuses the business to some degree. However, segmenting your clients based on their DNA Behavioral style will further increase your marketing and service delivery performance.

Behavioral segmentation will enable you to direct your communication and marketing to specific types of clients based on who they are. For instance, a Stability Need person needs to have communication which reflects safety and security. A Lifestyle Desire client needs to hear about how your solution will grow the fun side of life for them. When you segment your clients the emotional engagement with them will increase which leads to a longer term relationship with a greater share of the wallet.

Recently I was helping one of our Wealth Mentors with his client segmentation. He had all of his clients complete their Communication DNA profile. This enabled us to divide the client base into 4 quadrants of DNA style. Interestingly, because he is a Lifestyle Desire advisor this was the largest segment category. The Wealth Mentor knows having clients of a similar style to his makes relating to them easier.

However, the other key part about segmenting clients is addressing their values and life interests. The more that the clients values and life interests are similar to the Wealth Mentors the greater the chance of a sustained connection. The values are foundational as they will be at the core of every discussion and will be important when key decisions are being made. Having similar life interests eg sports or arts gives you something in common to relate to. In the case of our Wealth Mentor, he wanted clients who shared similar spiritual beliefs and also his interest in tennis. In his practice, other advisors wanted clients who were interested in environmental issues and football. What they found was that their relationships were much stronger with clients in these zones.

Once there are common values and interests, then whether you keep the relationship with the client will depend on natural DNA behavior. This gets back to segmentation based on behavioral style.

To learn more and to get started with implementing DNA Behavior Solutions to segment your clients, click here.