Short Investment of Time Can Pay Dividends for a Lifetime

Short Investment of Time Can Pay Dividends for a Lifetime

This article first appeared on Nasdaq.

We’ve been having an interesting conversation in our office about how often we have been required to complete a questionnaire, how long they have taken and the reason for them.

Some of the recent experiences of our team members:

  • Renewing a passport online – 45 minutes;
  • Completing a tax return online – 1.5 hours with all the documentation to hand;
  • Applying for membership at a local gym – 25 minutes;
  • A spouse applying for a part-time position – 35 minutes; and
  • Applying for a young child to go to school – 1 hour.

The topic was up for discussion due to occasional objections from advisors and clients taking a 10-12-minute behavioral insights questionnaire to best tailor their investment advice and financial decisions. Why wouldn’t every investor take 10 minutes to complete a one-time questionnaire that would change their investment approach and increase their wealth?

Moreover, why wouldn’t an advisor use the same 10 minutes to understand how to more effectively advise their clients through a deeper understanding of their own financial decision-making approach, cognitive biases and communication style?

The pause that empowers the process

Comparing the recent experiences of my colleagues to the 10 minutes it would take to reveal behavioral insights that would benefit both client and advisor for a lifetime of investing seems a no brainer, though I am admittedly biased, having spent nearly 20 years working in behavioral insights.

Even if that has not been your focus, it’s easy to see the value of completing questionnaires as outlined – those geared toward traveling, getting healthy, great kids education, work, and of course tax returns. Yet some question the value of investing 10 minutes as a gateway to a lifetime of behavioral insight-powered decision making (and investing).

Assuming a typical advisor minimum threshold for client investing is $250,000, and based on Vanguard research with over 56,000 clients, we know that advisors bring 150 bps of additional value to a clients portfolio through behavioral management. That is 1.5%, which means that an advisor has the potential to bring an additional $3,750 annually just by the client investing 10-minutes for completing a behavioral discovery questionnaire.

Whether you start your investment with a $500 gift from grandparents or are reviewing your million-dollar portfolio, take 10 minutes to get a comprehensive insight into your decision-making approach. Then ensure your advisor invests 10 minutes into you by completing the same questionnaire – then you have a wealth creating partnership. From a teenaged investor just setting out to a seasoned investor – the 10 minutes needed to uncover innate behaviors is unlikely to change with age or through various life stages.

Should my client invest 10 minutes?

Very often in my experience it is an advisor perception that clients will object to participating in a 10-minute behavioral discovery process. Yet when clients understand the go-forward value of that investment of their time, they not only are willing but eager to take part in fine tuning their wealth management.

Of course, advisors who want the edge such a behavioral questionnaire provides must choose one that is truly actionable, unlike the many questionnaires we complete that give us no real value and gather dust on a proverbial shelf somewhere. It’s not a one off, but something that provides lasting value as advisors and clients continue to reference the information.

In fact, with the right behavioral discovery tool, the actionable takeaways should be so practical that clients can leverage the behavioral insights in other facets of their lives beyond wealth planning and money decisions.

Clearer picture, clearer roadmap

Other short questionnaires around the financial industry often look at or reveal just one aspect, for example, risk tolerance. They stop short of providing a full picture of who the client is and can short-change both investor and advisor.

These narrower assessments that have been the norm for many years are outmoded. So, it likely is the time now to embrace more comprehensive behavioral discovery which provides a deeper, broader, more practical and lasting result.

As more people are exposed to the value and power of leveraging behavioral insights toward better and more tailored financial advice, it becomes not a nice-to-have extra, but a wanted, needed integral part of tailored, high-net-worth planning.

How many other things do you and your clients spend 10 minutes on that will not have near as great an impact or lasting return?

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?

Financial Personality Under Pressure

Hugh Massie of DNA Behavior International talks with AdvisorTV and Financial Planning Magazine about the predictability of investor decision making.

Manage the Emotional Roller Coaster of Events and Markets

When under pressure clients react based on their natural, hard-wired behavior.? Sufficient personal clarity to reliably know how an individual will react to life and market events starts with understanding their natural behavior.

Click Here to Watch the Video (Financial Planning Magazine, AdvisorTV)

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.


New Financial DNA Developments for Addressing Risk Tolerance

Risk tolerance is a much talked about area in financial planning and it is one core component of an investor’s unique financial behavior – what we call their Financial DNA. It is so fundamental that we are always talking about it and making decisions with reference to it.

A huge difficulty has been reliably measuring an investor’s risk tolerance. One of the problems is that an investor’s risk tolerance is assessed today but then a portfolio is developed for the long term which has to cope with fluctuating markets. Do you truly know what your client’s risk tolerance for the long term is? How much of your assessment of the client’s risk tolerance is based on current situational factors and their emotional impulses today about the market? Then add in the fact that a person’s risk tolerance may differ across different asset classes. Of course, an advisor’s own risk tolerance can color the situation resulting in the client “eating” the behavior of the advisor. There have been lots of examples where a group of advisors addressing the same case facts at the same time will come up with different risk tolerance assessments for the client.

After more than 10 years of studying financial behaviors, including risk, and performing research based on our online profiles Financial DNA Resources has now launched our “Behavioral Portfolio Report”. You can download a copy of it here:

The Behavioral Portfolio Report provides a comprehensive and holistic analysis of a person’s complete financial behavioral style resulting in the creation of what we call an “Inside-Out Portfolio”. The inside-out portfolio gets to the level of asset classes and also tactical factors for investment selection. This then becomes the foundation for the financial plan and investment policy statement.

Fundamental to the Inside Out Portfolio is a superior analysis and quantification of the person’s risk perception and risk attitude. In particular, our analysis uniquely dissects their:

1. Understanding of risk and return – if this is high then they are likely to see investment markets as less risky
2. Risk propensity to take risks (or be bold) – their behavioral inclination to make daring or bold choices
3. Risk tolerance – which is the ability to live with the consequences of taking risks

Interestingly, our research has shown that in 20% of cases people have a higher risk propensity than risk tolerance. This is critical for advisors to know as their client could take greater risks than they can stomach.

Core to our Financial DNA work has been the discovery of a person’s natural “hard-wired” behavior – these are the behaviors that remain stable through a client’s life. This applies equally to risk propensity and risk tolerance.

Recently, we have had people re-take our profiles to determine profile consistency with time gaps of over 3 years. The consistency level has been very high which is powerful considering the turbulent times we have been living in.

It is key to know a client’s natural risk profile for building a portfolio as this is the behavior which will reveal itself when they are under pressure and generally throughout their life. This behavior is highly predictable. However, you do need to know the client’s current financial preferences as well based on experiences and education. This will tell you where they are at now and how much portfolio variance they can accept, and what additional guidance they may need in the portfolio construction phase.

So, our view is that you cannot know enough about your client when you are advising them. Knowing all of the dimensions of the client’s risk attitudes and objectively quantifying them is important for the “know your client rules” and more importantly to be able to have a transparent discussion with your client to properly manage their expectations. Using your intuition is very important but it alone is not enough. Now is the time to start educating your clients with much deeper and applied behavioral insight.

Global Transition for High Net Worth Individuals

I have just read KPMG’s Swiss Financial Services Newsletter for August 2008. The newsletter provides very sharp insights into the increasingly complex international needs of high net worth individuals. The outcome is that the consulting team will need to have a greater global outlook and more sophisticated approach to the technical and human issues impacting the HNWI client.

Some of the key trends driving the changes in how HNWI’s need to be serviced are:

  1. Investments of HNWI’s are continuing to become more global and diversified
  2. Stronger demand for superior life quality resulting in lifestyles taking on a growing international flavor
  3. Family members living and working internationally away from the home base
  4. HNWI’s want their consultants to play a collaborative role – working with them, not for them
  5. Demand for a higher set of values including ethically correct behavior, social recognition and reputation

Specifically for the consultant this will mean their service model needs to meet the following requirements for the HNWI:

  1. Capability to deal with many different legal and tax jurisdictions, which means increased complexity and recognition of cross border issues
  2. A personal approach and outlook which is cross cultural and able to adapt to diverse human requirements
  3. Focus on comprehensive, customized solutions with a holistic perspective that take into account the concerns of the HNWI, short and long term goals in life and multi-generational family issues
  4. Clearly understand their vision and be able to anticipate their unique needs
  5. Understand them in the context of a larger relationship which encompasses both family and business matters
  6. Provide a single point of contact with access and the ability to coordinate a worldwide, comprehensive network of professionals
  7. Be free from conflicts of interest and exercise absolute independence
  8. Innovatively deliver and implement best in breed solutions
  9. Have systems that assure complete security and confidentiality
  10. Provide the reliability of a recognized brand name

I definitely believe this is the new world order for HNWI services. Very few can do it individually. Great collaboration will be needed to be successful.

Personally, over the past 10 years my approach to this has been to play the role of “brains trust” to HNWI’s by firstly understanding who they are at a deep level. Then as part of this role, be the independent sounding board to deal with the complex issues and bring in the right specialists as and when needed.