Are We Hardwired To Derail Our Own Investments?

This article first appeared on Nasdaq.

People don’t make rational decisions, including decisions about investing. The degree to which we make ludicrous choices depends on our DNA. (No, really; bear with me.) Decision making by both investors and advisors can be less reckless if we don’t understand more about individual behaviors and why we make the financial decisions we do. Are we hardwired to derail our own investments?

Factor into this mix emotion and a lack of financial education, and this further increases the likelihood that decision making can be faulty for both advisors and investors. Getting inside our brains to see what’s going on when we make decisions is not only doable, it’s also measurable.

As behavioral finance (think How and why we make the financial decisions we do) goes mainstream, investor behavior has become more accepted as the major influence on investment performance. If advisors have no read on how or why investors make certain decisions, mistakes will be made.

So how does one become what I would call Behaviorally Smart? According to its annual Quantitative Analysis of Investor Behavior, Dalbar – a financial services market research firm – says investment losses to individual investors due to their behavior is an average of 8 percent per year over the last 30 years.

And this is not just limited to the investor. Based on a study by Cabot Research, professional investment managers are leaving 1 percent to 3 percent a year on the table, which is significant when you realize the size of these large portfolios. So even the professionals who use sophisticated technology and extensive research make mental errors in decision making.

After all, they are human and must manage cognitive biases and emotions when under pressure. The more aware you are of yourself and what makes you successful and what causes failure, the better off you’re going to be financially and professionally.


So, how can investors improve? There is no simple tonic to improved performance, as this requires wholesale behavioral change – a paradigm shift in how someone engages the world around them. The key, then, is understanding your unique financial personality. Among other things, this insight provides a greater level of self-awareness: Why do we repeat our mistakes?

Advisors and investors alike need to develop an investment process that provides a check yourself before you wreck yourself step to mitigate these blind spots.

Through more than 15 years of research, I have learned that easily identifiable behavioral traits lead to patterns of decision making that are very closely aligned with the structure of an investors portfolio. In other words, the combination of traits and patterns makes up your financial personality style. Your portfolio, therefore, mirrors who you are. In fact, investors should look at their portfolio as the composition of all their decisions and not just a series of market positions.

The reality is that some behavioral biases cost more than others. Based on Cabot Research, the top four ways the brain can wreck investment performance are:

  • The Endowment Effect – Holding winners too long. The investor falls in love with a winner and loses sight of the fact that its best days are gone. There is the fear of selling the position too early.
  • Risk Aversion – Selling young winners too early. The investor has fears about the future and does not want to take the bumps in the road as the stock increases in value.
  • Loss Aversion – Holding losers for too long. The investor is fearful of taking a loss and ends up with a portfolio full of losers.
  • Regret Aversion – Not adding to winners when they take off. This is an investor who is hesitant in their decision-making and backs out of building the stock position as it gains momentum.

Based on your history of decision-making, which of these patterns have cost you the most? And remember, there are many other behavioral biases, which, coupled with these, will further contribute to reduced performance. To help you on the journey of closing the investment performance gap, start with self-awareness of your behavioral traits.

For investors, this could be as simple as asking your advisor if he or she uses a validated behavioral insights tool that looks beyond risk-tolerance testing. For advisors, the time and money invested in adopting such a process can pay big dividends for you and your client, pun intended.

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

Why not complete your own complimentary profile and see which behavioral biases may affect your financial decision-making? Click here

Discovering the Silent Killer

Indifference. Websters dictionary defines this word as lack of interest, concern or sympathy.

J.D. Powers and Associates just released the results of a survey that found 31% of financial advisors were indifferent about their work and have no strong attachment to their firms.? Without a connection to their firm, these advisors are likely to be open to discussions with competitors.

There is a silent killer lurking in the midst of our organizations. Could a third of your clients be classified as indifferent? of the biggest challenges with identifying indifference is that we usually judge our clients through our own viewing lens.? That is not always objective. Or we point to our annual client surveys.? But there is a risk that you can have lots of data and not see what it is saying.

Indifference can translate into business risks.? The first is that the client will not stick to their financial plan and that will present problems for you in the form of difficult conversations and unrealized goals.? In addition, the client will not add money to their account or provide any referrals.? Finally, the client is open to conversations with other advisors and the ultimate risk is losing the entire relationship.

What can you do to combat the silent killer?? Start by asking a lot of questions to get beneath the surface of a client. Human differences are really the hidden obstacles in any relationship.? It takes time but you will uncover the behavior and emotions that lead to authentic engagement.? Next, be sure to adapt your communication style to that of your client. You might be excited about sharing all the market data when in reality your client is happy with the concrete, bottom line results. Finally, customize your products and services to your client.? A lengthy newsletter is not necessary to clients who prefer picture, graphs and bullet points.

All of these recommendations may seem small. But small changes produce big results.?? Keep in mind that it is in understanding behavior that leads to customer engagement.? When your clients are connecting with your firm at a deeper level, there is no room for indifference.

Learn how you can objectively uncover and navigate the different financial personalities of your clients by visiting the Financial DNA website.

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?

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.


Resistance to Financial Planning

Last week, there was a Financial Planning Association group discussion in which someone posed the question: Why do people resist creating a formal financial plan.

This is a great question and gets to the core of financial planning.

Many people do not know what financial planning is. I think many financial planners are still learning what it means to them. As the industry grows and comes to more of a collective view then this will help. Is the planner about achieving returns or helping a client achieve life and consequently financial goals? What role is the planner playing in the client’s life?

Those who accept the planner as their financial life guide will more likely do a financial plan. Another key point is the person’s level of personal trust. Do they have fears about planning and sharing themselves and getting help? Do they trust the planner? Both issues are at work.

I also find that if the planner is not a trusting person (and our research shows 70% are not) then this is not conducive to building relationships and getting planning commitment. The question of trust gets down to both a person’s DNA behaviors and their life experience. The more the planner represents product and is not independent then trust will also be harder to build.

Ultimately, the more a planner seeks to know their client and make the client feel they are understood then the chances of getting the plan done increases. Further, retention will increase. The client is not a financial number but a person whose life constantly develops.

Know Your Client’s Trust Levels

Last week I was working with one of our Certified Wealth Mentors with my role to offer some behavioral insights on some difficult client cases. The cases were difficult because of the clients attitudes not only to financial decision-making but also to life. These cases reaffirmed to me how much trust is core to all dimensions of every client situation. This is why when we redeveloped our DNA personality system in the past year we made trust a new stand-alone personality factor.

Often when we talk about trust it is in the context of our role as trusted advisor and building open relationships with clients. Certainly, this is an important dimension. Talking about trust in this way is fine. However, the heart of truly understanding trust and to knowing our clients is to know where trust comes from. There are a number of very important dimensions to trust that we all need to know. Let me ask you the question: How much do you trust yourself? Trusting yourself is the starting point of building sound relationships and also making sound decisions. Your own level of personal trust will determine whether you will trust others and then whether others will trust you. So, if you want to know whether your clients will trust you, reflect on your own level of self trust and then learn about their self trust.

We all have a natural level of trust which comes with our natural DNA behavioral style and then there are life experiences added on top which deepen or reduce our trust levels. The more we know who we are and have personal confidence then the more likelihood that we will trust.

In one of the client cases I was referring to the client was 60 years old with a very successful business and over $10 million to his name and annual income of over $2 million. However, he was personally unhappy, not prepared to let go of the iron grip on his business or prepared to create an estate plan his family could know about or be involved in. Does this sound familiar? This is a client who has very low personal trust levels and it transcends every part of his life. It will be very hard for this advisor to get close and really provide the advice he needs and on the other side the advisor will find it hard to meet expectations. A no win situation.

Have you seen people make fear based decisions and not be transparent? This starts from low personal trust levels. As a service provider you want to know your clients trust levels early if you are going to have a close and profitable relationship. You will never be able to help this type of person until you can discover the source of the fear. The difficulty is getting them to tell you. I do find that when you can get a client to talk about their strengths and passions you have a much greater chance of unlocking the fear, and trust grows from there.