What is the Ideal Advisor?

Every person is unique and has unique needs and circumstances.

Each client wants to be related to and served differently because their financial personality is different. This should be one of the primary drivers of who they seek out as their advisor to build a life time advisory relationship with.

Leadership in the Financial Industry

However, foundational to the choice for clients is that the advisor is capable of providing them with a comprehensive service that holistically addresses all of their life and financial needs. The CFP Board has recently conducted a research study that found:

91% of those surveyed said they wanted their financial advisor to take into account their total financial situation, while 70% said they would prefer to work with an advisor who provides comprehensive financial planning services. Thirty percent said theyd prefer to work with someone who specializes in one area such as retirement.

This research provides good insights for advisors building their practice.

Read more at the Think Advisor website.

Although, comprehensive planning is required by clients ? it is still important that advisors know their strengths and struggles so that they always play their A game in attracting and serving the right clients.

To learn more about uncovering the advisory blind spot, please visit the Financial DNA website.

Try Financial DNA Free for 30 Days.

Keys to Developing a Client-Centric Approach

If you don’t decide strongly for yourself the favorable outcome you want out of a client/advisor relationship, your success as an advisor will likely come from others’ definition of success.

In most cases those who ask for financial advice already know the answer. Often this is based on their instinct and seeking professional advice delivers not only a confirmation but probably a measure of confidence in terms of trusting their instincts.

The measure of a strong advisor client relationship lies not in the confirmation of things already known but whether or not the advisor has the skills to take the relationship to the next level.

Financial Planning, Financial Personality, Quality Life Planning, Perpetual Income

A primary responsibility of an advisor is to gain an understanding of where the client is going before deciding how to get them there. This level of connection begins the process of taking the relationship to the next level.

Investing time into understanding the journey clients are on can only be achieved if the advisor firstly understands how to communicate effectively with them. Communication is the key that unlocks closed relationships and makes a pathway for questions to be asked in a way that causes no offence and yet elicits answers that go to the heart of how a client wants to use their money.

  • what their drivers are
  • the plans they have for their lives and those of their family
  • their tolerance to risk

Perhaps more importantly such an approach opens the door to insights that inevitably allow the advisor opportunities to upsell in a non-threatening way.

Todays economic landscape is constantly evolving and as a result people are far more cautious about the advice they listen to. Clients are likely to seek advice from many sources but are far more likely to return to those whose advice is based on understanding their journey and knowing how to communicate effectively with them. This is the relationship that not only delivers success for the advisor but peace of mind for the client. A win win.

Visit the Financial DNA website to learn more about how you can develop a client-centric approach.

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.

Shirt Sleeves to Shirt Sleeves in 3 Generations

In recent years there has been a lot written about how wealth created by the first generation (the entrepreneur) is lost by the third generation. Often the second generation has also added to the wealth. Then the third generation has lost it through being irresponsible, idle or simply making poor decisions.

Research from a range of sources is consistently showing that this is happening in over 70% of family wealth transfers.

A significant aspect of intergenerational wealth loss is related to the fact that the financial and estate plans do not adequately take into account the human issues involved. Very often poor communication and relationships within the family along with negative emotions lead to bad decisions. The reality is that many wealth transfer plans whilst technically sound become redundant the day after the wealth transferor passes on.

So, how can you improve those statistics so there is greater intergenerational wealth preservation and also family harmony?

The solutions are found in some interesting research undertaken with a high number of wealthy families by groups like Family Office Exchange and also The Williams Group. Their research points to the top priorities for the families are now to address areas such as family legacy and the family relationships. Whilst investment competence is important it is somewhat low on the list. Investment management is generally seen as a given and considered somewhat of a known science. Notwithstanding, getting the family to adopt these priorities and change their behavior is another matter. If you are an advisor, accountant or attorney what areas should you spend the most time on?

The importance of building greater family unity cannot be underestimated. The family needs to have a defined legacy with a shared mission and set of values. This then becomes the framework and platform for family decisions, dealing with businesses, inheritance, financial education, philanthropy and so on. If needed, bring in specialists to deal with the human dynamics and facilitate this. We often do this with advisors. So, I would really encourage for family meetings to be held. Whilst this process can be expensive in some cases, it does not have to be. Just being aware of the importance of these issues and doing a little more to work on them even through more “relational” discussions will help. Of course, for a high net worth family with many financial complexities and plenty of family history then a family meeting is a great idea and will lead to great results.

Know Thy Investments

The primary foundations of Financial DNA are “Know Thyself” and Know Thy Client”. However, what I have not spoken up much before about is “Know Thy Investments”. For both the advisor and the client this is absolutely critical to successful investing. Who at some point has been caught in an investment they did not fully understand and lost money? Usually, they are the “smart” investments that offer lucrative returns and/or tax breaks.

In recent times, I have had discussions with many advisors and investors who have been caught with an investment that they did not fully understand. You should forgive yourself because even the best investors have been caught at some point. This point is not just about “ponzi schemes” but also bona fide investments.

Market declines like we have had in the past year usually expose the cracks. When the market is going up the holes can often be covered up. Some of these investments are so complex that not even the creator or manager even understands them fully, let alone the advisor recommending it.

I have always said to my clients: “If you do not know what is inside the sausage do not invest”. Until a year or so ago, I did have some doubts as to whether I had been too conservative and that I was the fool for not riding the trend. Well now I am very relieved. A good example of this advice was 5 years ago when I told a very wealthy retired couple not to invest in a hedge fund that they had been offered by someone who was trying to impress them.

I do not believe most people know what they have invested in other than the belief they will make a lot of money. Many hedge funds rely on very complex models and very fine margins. Also, many change their strategy after you have invested. So that what you have invested in is not underneath the same investment as what you exit. I also know that many investors and advisors did not understand how leveraged with debt our financial markets were. All of these complex products usually have a lot of debt in them. So when the market declines, the fall can be accelerated because everyone has to get out quickly.

If you are an investor, now is a great time to review all of the investments in your portfolio and check that you truly understand them. Also, does your advisor understand your investments? Can your questions be confidently answered? I also think advisors need to take stock and totally understand what they are offering their clients. You really need to get behind the “research” reports.

Understanding Client DNA Behavior Under Pressure

When I was a financial planner and even before that a CPA, I had regularly observed that people’s behavior and decision-making patterns changed when they were under pressure; the pressure often being caused by money and relationships. This observation was fundamental to my thinking when I was building the Financial DNA Discovery Process with my team. We wanted to know what a person’s natural instinctive behaviors are as this would be key to predicting how they would really behave when there were difficult times and/or difficult decisions had to be made.

This plays into the research we recently did of 100 advisors with AUM over $50million. 70% of them said that they were surprised by their clients reactions. Why? Well, it is the natural DNA behavior taking over based on genetics and our very early life experiences which shape the neural pathways in the brain. In the good times, we all operate out of learned behaviors based on experiences, education and values. Hence, we have a greater chance of managing our emotions in favor of rationality. Under pressure, that switches.

It was interesting to read the Wall Street Journal Article on Saturday April 4 by Jason Zweig titled: “Influence of DNA on Your Investing Style in Troubled Times”. Whilst different methodologies were used to discover this DNA behavior than we use, the conclusion is much the same. Zweig made the following point based on his own interview with Dr. Ahmid Hariri at the University of Philadelphia: “There is always a tug of war inside each of us between nature and nurture. But during scary times like these, says Dr. Hariri, “environmental stresses can play a critical role in unmasking any underlying biases determined by your genes.” In other words, bear markets give nature the upper hand. It is now harder than ever to stick to the disciplines that can override your genetic impulses, but it also has never been more important”.

So, now more than ever is the time to truly discover your client’s DNA behavior and help them from the inside-out to achieve higher financial life performance.