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Corona virus Fear is Not a Winning Investment Strategy

Coronavirus Fear is Not a Winning Investment Strategy

In crisis the tendency is for all of us to react emotionally and follow the herd. With headlines screaming a global economic downfall due to a flu pandemic, remember you are genetically hardwired to react in certain ways.

If you find yourself responding outside your inherent behavior because your reaction is to the coronavirus not the market turbulence, STOP – and check yourself before you wreck yourself.

Get a handle on the facts and the reality of the situation before you make a decision, hastily dumping investments or rushing to add suddenly inexpensive “buys” to your portfolio.

Behaviorally smart investors and their advisors know that everyone reacts differently to turbulent markets. Don’t get mixed up with the herd mentality; don’t be distracted by outgoing colleagues and friends rushing to jump on the bandwagon of what everyone else is doing.

If you’ve found this last week unbearable, its likely you’ve misjudged or are unaware of your own behavior and risk tolerance. This is important insight for every investor to know.

If you have a financial advisor skilled in understanding financial personality, be guided by them.

If not, commit to understanding your own financial personality before it derails your investment strategy and wrecks your retirement plan. It only takes 10-minutes and may be the best investment you make.

Learn more about Financial DNA’s Market Mood. Questions or further information- inquiries@DNAbehavior.com.

Digital key in keyhole in information security concept

Financial Advisors See Data as a Differentiator

This article first appeared on Nasdaq.

With financial advisors under considerable pressure to strengthen their competitive position through an improved understanding of their clients, adding a behavioral insight tool to the client onboarding process can help advisors obtain new insights about a client’s behavior and financial personality.

In doing so, it is imperative for firms to interrogate this data that is relevant to each client. The way to use data as a differentiator is to know clients at a deeper level. Their decision-making style, spending patterns, goal-setting motivations, approach to and tolerance of risk, behavioral biases, and responses under pressure, as well as knowing each client’s likes and dislikes and life journey.

Measuring and discussing financial behavior is the first step for advisors to get to know their clients. And we already know that, for advisors to provide valuable advice, it is key that they understand clients and client goals.

Gone are the days of form filling. Advisors need in-depth, accurate information at their fingertips. Clients already understand that life requires them to be subjected to an array of technology experiences. They get it.

What many clients do not accept is poor service. For instance, feeling that they are not front and center of the relationship. Feeling they are a statistic. Feeling like the financial advice they are getting or the way they are getting it is generic or ill-matched to them.

When advisors start to deploy technology which delivers a great experience for their clients, then and only then will they gain a competitive edge and restore broken trust.

The use of application programming interfaces (APIs) is presenting a new and exciting range of possibilities to financial advisors. Essentially, APIs act as a sort of plug in, bringing a specific functionality to other, already up and running systems, so an advisor, group of advisors or small or large organization can add bells and whistles to a system without having to invent/reinvent their own.

Such an API can permit the flow of information between applications and give financial advisors the ability to, in this circumstance, easily access on a real-time basis client data, gain insights and offer innovative solutions tailored to the clients’ life plans while complying with regulatory requirements

Through the magic of APIs, “behavior tech” platforms can now be white-labeled and inserted inside organizations so that they can access scalable and easy-to-use online behavioral management solutions to know, engage and grow every client (and their advisor!).

APIs like this are not tomorrow’s solutions. They exist now, waiting only to be embraced and leveraged. This is the power – here and now – to use behavioral insights to create truly unique and robust experiences for advisors and clients. It engages clients in a way that demonstrates the degree to which advisors will go to enhance the financial planning experience – and the success they can have with and for a client.

Every financial advisor should be able to use interactive business intelligence tools to drill down into client information. In advance of every meeting or phone call the advisor should, at the click of a button, be able to deploy dashboards and personalized information to respond to client needs. This approach can and will create an experience tailored to individual clients’ needs.

Clients and advisors alike want “easy” and they’ve got it if the right API or behavior tech solution is deployed. Everything is right there on their mobile devices.

How to Become a Behaviorally Smart Advisor

How to Become a Behaviorally Smart Advisor

The financial services industry needs new business models ones that help re-define what a financial advisor is capable of beyond just a numbers oriented investment orientation. The traditional twenty-five year + model of providing investment access and selection is being disrupted by technology and new players coming from other industries. The friction from this evolving operating environment seems to be leading to exploring more holistic and new client-focused experiences that create more engagement and deeper connections.

The Institute for Innovation Development, to explore this further, recently talked with Leon Morales, Managing Director of DNA Behavior International a behavioral finance technology platform designed for financial advisors to Know, Engage and Grow their relationships with their clients and prospects. We discussed the evolving nature and changing value proposition of financial advisors into this more holistic model with advisors serving as client behavioral coaches and mentors.

Hortz: You have frequently quoted from the Spring 2000 Journal of Investing article that states 93.6% of the financial planning process is the behavioral management of clients. We have always understood that being an advisor is, bottom-line, a relationship business but, what does that number tell us about the true nature of the financial advisor role

Morales: All the studies and resulting data that have looked at the issue appear to agree, that client behavioral management is one of, if not the, most important function of financial advisors. Understanding the clients communication style, personality, emotions and fears, these need to be mastered and managed by the advisor. Learning practical ways to understand the individuality of clients, how they make decisions and what triggers their emotions, are key to being able to guide the client over the longer term successfully, coaching them to truly achieve financial goals. What this points to is the ultimate importance of advisors being behavioral managers as much as they are technical managers of investments.

Hortz:What do you recommend as the key steps advisors must take to start strengthening their behavioral IQ and behavioral management skills with clients?

Morales: The most important step required for moving from the traditional financial advisor role to that of a Wealth Mentor is to learn first how to ask much better questions of the client. This enhanced discussion builds greater client relationships and opens the dialogue to reveal core behaviors, biases, reactions under pressure and other issues. Part of our Certified Wealth Mentor program’s takeaways is a list of many key conversation opener questions, used for client meetings. Further, the questions will encourage the clients to probe their own thinking. The advisor then gains insight into how the client makes decisions, the client’s reaction to taking a new direction, or confirmation they are on the right path.

Together with insights from our behavioral reports, this enables the advisor to identify points of alignment between what’s stated in the report, versus what clients are saying. This comparison enables the advisor to zero in on the clients areas of strengths and struggles and narrows down the tension between processes and behaviors that might get in the way of delivering outcomes. This kind of client connection, using our very concrete system, builds long term advisor/client relationships and advisors will know how to manage client bias and reaction under pressure.

Hortz: What are some predictable insights you can discover about your clients

Morales: Our DNA Discovery process delivers insights in several key areas:

  • Communication- -enables advisors to connect and work with the client on their terms
  • Biases – – awareness of assumptions or mental habits that need managing
  • Spending patterns –uncovers money habits that may impact investment strategies and outcomes
  • Risk tolerance and reaction to market movement- provides detailed behavioral insight into the client’s natural risk tolerance and risk propensity

Hortz: Can you walk us through your claim that a behavioral approach, using your wealth management platform, results in 99.5% client solution suitability and additional client value

Morales: The use of the Financial DNA behavioral approach enables the advisor to more deeply engage with their clients. Asking the right questions, and having a robust discovery process that more rigorously breaks down all the elements that make up risk, to a much tighter client discussion, reveals how much risk really needs to be taken, how much risk could financially be taken, and blending learned behavior and natural behavior to cover the right level of risk. Behaviorally smart advisors -who manage these conversations with the client well – will get a much higher level of suitability in what they recommend and what gets deployed or purchased in the end.

Dalbar research shows that 7.45% a year is the potential loss because of investors not having an advisor and making poor decisions. There is safety for clients in having a behaviorally smart wealth mentor manage their portfolio, rather than trading their own accounts. This goes back to the risk profiling where we believe we can get to 99.5% clients solution suitability. Therefore, 91% reflects accuracy from the DNA Natural Behavior Discovery and the other 8.5% comes from the learned behavior discovery.

Hortz: Do you see an evolution in what a financial advisor’s core job is and how they will be perceived in the future?

Morales: Yes. I believe that the advisor needs to become a guide for life for the client and to be able to navigate all the issues clients might face. When the client sees the advisor as their go to person for help with decisions, a trusted collaborator, that not only impacts their financial and investment world, but also life decisions and choices, all of which are foundational and have financial consequences. This kind of advisor-client relationship opens wider conversations regarding family dynamics. Advisors need to be the family advisor, and that’s going to be a big area for them in the future. To do that, they need to broaden their skills to handle a wider range of areas, or at least be able to communicate about them.

Importantly, a core adjustment required is the change from client meetings to client conversations. The word conversation makes the advisor/client engagement process easier, less formal, more likely to deliver open discussions. This adjustment is the process we have been bringing in to some of the firms we have worked with recently.

Hortz: How do you help advisors change their habits and ways of doing business to help them evolve into this new advisor business model

Morales: While education and our Certified Wealth Mentor Program are an important part of the process, a key strategy for DNA Behavior International, in order to help advisors make this happen, is to embrace our role as a behavioral Fintech company. We can now take our behavioral tools, processes and knowledge and embed that into their practices through an easy, accessible, online behavioral platform which provides them with practical and scalable behavioral intelligence across every client and firm employee. They would have readily available behavioral awareness, using our built-in discovery processes, and real-time behavioral management capabilities using our apps. Behavioral management can now be infused into the DNA of the firm.

Hortz: Tell us a little about your steadily growing list of strategic partners (BrilliantFIT, AMP) and how you work with them in extending your behavioral platform and resources to equally support advisors, clients, and other key financial services vendor firms

Morales: We have a wide range of technology integration able to be deployed, not just in the financial services arena, but across many disciplines and industries. With Financial DNA, we are a leader in the deployment of personality and behavioral based tools, but we also have such relationships as our hiring partner Brilliant Fit, based in Melbourne, Australia. They are making inroads by integrating behavioral discovery to the filtering of candidates for management roles and ongoing career development.

We built an alignment with Salesforce, so DNA insights are on the Salesforce platform. We are also currently working with firms on matching advisors to clients based on personality styles. We work with big data to open a significant access to leads by building algorithms to be able to link that data to personalities. We are working with a range of financial planning software groups globally using our behavioral chip strategy to power the behavioral management of the client experience.

Hortz: From your perspective in building to and working with a wide cross-section of financial advisors, what is your best advice for advisors in how to navigate this changing business environment in which they are now operating?

Morales: From my perspective, the first key point would be for advisors to develop their emotional intelligence (EQ). Personal development will make them more effective advisors as they interact with a wider range of clients. Maturing professionally in this way will make them a better advisor in guiding others through life challenges again, an expansion of their roles beyond financial guidance. This approach is what will lead to sustainability of the relationship.

Also vitally important are building more processes inside their businesses, particularly around technology, to enable a customized experience to be delivered. Introducing good technology releases advisors to build business and identify gaps where they need to hire and develop good teams.

A further key area is looking at existing revenue models. The current approach needs to be reviewed considering the changing role of advisors with the ability of advisors to become behavioral coaches to their clients. Knowing the importance of behavioral management, advisors can use these behavioral insights to look at how they make their money.

Delivering goals-based financial planning means advisors need to look at how they bring in a retainer fee for working with the clients on an ongoing basis. The new revenue model needs to reflect: running the annual meetings, helping the clients work out their goals, navigating difficult decision-making situations and transitions. Price points can be reviewed, as they add value through mentoring- coaching clients on how to manage their behaviors towards their goals.

Ill leave advisors with one of the favorite quotes of our founder, Hugh Massie: Strict rationality kills culture and relationships, and unmanaged emotions destroy wealth. Financial advisors will be well served to be able to deeply engage and reconcile client thinking and behavior with that clients life and wealth goals.

Written by Bill Hortz, Founder & Dean, Institute for Innovation Development

The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors – Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). For more information click here .

bad attitudes are contagious

Bad Attitudes Are Contagious

Workplace attitudes influence every person in the organization, from team colleagues to the leadership. Attitudes can control the workplace environment by impacting morale, productivity, and team effectiveness. Understanding and recognizing the behaviors that are at the root of poor attitudes is essential to the ongoing success and security of the business.

It only takes one person with an unchecked bad attitude to bring down an organization. The power of such an individual to cause destruction will stem from a variety of places: fear, anger, dissatisfaction, jealousy, or bad attitude. Whatever the trigger, the danger, if this behavior is left unchecked, can become a weapon of mass destruction to the business.

What part do you play in ensuring inappropriate behavior is challenged? If you hear or are part of an exchange that begins with.. “just between you and me,” or “I know you won’t tell anyone..”, it’s clear a confidence is about to be broken. So, what is your reaction?

Low-level gossipy stuff is every bit as important to identify and stamp out as is a wolf in sheep’s clothing. That one who presents as committed, loyal and trustworthy, but, under pressure, this surface learned behavior can turn lethal.

A person who intentionally sets about leaking classified information (for example), and not always for monetary gain, but simply because they have been passed over for promotion, or they have some ideological position that they think legitimizes them to leak information. These are the people that CEOs are crying out to identify to limit the damage.

A recent article in BuzzFeed News reports: Reality Leigh Winner, a 25-year-old Air Force veteran, was arrested on Saturday after the Department of Justice alleged that she printed out a classified document on her work computer and mailed it to The Intercept. Winner served in the Air Force for six years, where she worked as a linguist specializing in Arabic and Farsi. She had recently worked for a government contractor in Augusta, Georgia, where the NSA also has a facility.

Only time will tell as to her motivations, but the question to ask is this – could managers and supervisors have read any signs to alert them to a rogue in their midst? The answer is yes.

The 2016 Global Fraud Study by the Association of Certified Fraud Examiners (ACFE) estimated that the typical organization loses 5% of revenues in each year because of fraud. The total loss caused by the cases in their study exceeded $6.3 billion, with an average loss per case of $2.7 million.

These statistics expose the need for robust and validated analytics to be the foundation for identifying/managing behaviors that can become a potential threat to business.

DNA Behavior‘s founder and CEO Hugh Massie has always advocated the importance of putting people before numbers. He believes that investing in understanding people, and getting below the surface of what is seen, to discover inherent behavior will, in the end, safeguard the numbers, while protecting the business.

Monitoring employees through the collection of Big Data can provide insights into social networking, relationships and even reveal normal behavior turning malevolent, but falls short. Readily available psychometric assessment tools bridge the gap. The Business DNA Natural Discovery Process identifies, who, when placed under pressure, is most likely to cause disruption to the business. Further, they reveal the environmental catalysts that provoke such behavior.

In the current theater of world politics, opinions are heightened. 80% of future lone wolves are known to take politics personally and claim that they have been wronged enough that action would be justified.

But creating rogue behavior does not necessarily require a change in government or some other significant change – the threat within can be a team member who cannot cope with pressure or are dissatisfied with the environment in which they work. It’s that simple. This kind of behavior can be revealed and managed.

The solution is the deployment of a validated personality discovery process, providing insights into hidden, hard-wired traits and a reliable prediction of where security or compliance risks exist. Based on external research, employees with the following measurable behavioral traits are more likely to engage in rogue behavior when emotionally triggered:

  1. Innovative – bright mind, which turns into curious and devious thinking
  2. Ambitious – desire for success, leading to cutting corners
  3. Secretive – working under cover and not revealing key information

When every member of a team knows, understands and is comfortable with each others behavior, it not only builds trust, but such effective teams give companies a significant competitive advantage. High-functioning teams would identify and weed out malevolent behavior instantly. They are alert to any sign of inappropriate behavior and challenge it.

Becoming a behaviorally smart organization is as simple as using a highly validated behavioral discovery process. Armed with the depth of insight such a discovery provides, management can dynamically match employees with specific environmental conditions to determine their potential response. They can also discern the degree to which such responses could create damaging behavior and negative actions towards the business.

Lastly, management can apply these insights towards talent re-allocation, employee evaluation, team development and improved hiring processes.

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

Which Employee is Your Molotov Cocktail

Which Employee is Your Molotov Cocktail?

Potentially 5% of your workforce includes employees that are a high-security risk. The cost of all types of fraud is a staggering 5% of turnover, per the 2014 Global Fraud Study by the Association of Certified Fraud Examiners (ACFE.) So, what’s the cost of rogue employee behavior to your business? Simply identifying the personality type most likely to cross the line and the triggers that push them there could save you big dollars and your reputation. Or better yet, how do you help an employee to align their strengths to a given role and avoid rogue behavior altogether?

While larger businesses are investing more in cyber security and other monitoring programs, virtually nothing is being put towards identifying and monitoring costly employee behavior risks. The problem is that many of these insider threats are already in your business and the situation is gaining momentum without anyone being the wiser. The Global State of Information Security Survey 2015 recommends that 23% of the annual spend on business security should be directed to behavioral profiling and monitoring of employees.

Research shows that the following problems are caused by human behavior:

  • Combinations of human behavioral factor outliers and external environmental factors (e.g. financial difficulty) trigger emotions causing negative behavior toward the company.
  • Combinations of employees with too similar or too different styles working in a high-risk environment cause internal control issues.

Which Employee is Your Molotov Cocktail

The solution is the deployment of a validated personality discovery process, providing insights to hidden, hard-wired traits and a reliable prediction of where security or compliance risks exist. Based on external research, employees with the following measurable behavioral traits are more likely to engage in rogue behavior when emotionally triggered:

  1. Innovative – bright mind, which turns into curious and devious thinking
  2. Ambitious – desire for success, leading to cutting corners
  3. Secretive – working under cover and not revealing key information

The reality is that any person with a weak or temporarily broken character in the wrong team or facing external pressure can make flawed decisions and therefore, become the source of costly negative behavior. The employee behavior review using personality assessment methodologies should be uniformly applied to every employee in the business from the top down to distill the “hot spot” areas. The high performing leaders down through the sales and operations teams to the disgruntled bookkeeper are not exempt – New hires, or old guard, every last one. You only have to look at the recent headlines regarding Wells Fargo, Volkswagen, and JP Morgan. I am regularly seeing it in the financial services industry and the privately held businesses with whom we partner.

Which Employee is Your Molotov Cocktail2

Using behavioral insights, management can dynamically match employees with specific environmental conditions to determine their potential response. They can also discern the degree to which such responses could create rogue behavior and negative actions towards the business. Lastly, management can apply these insights towards talent re-allocation, employee evaluation, team development and improved hiring processes.

The Traditional Approach to Risk Discovery is Outdated

Solving The Dangerous Voids in Risk Profiling

No doubt, intense discussions surrounding risk tolerance and behavioral finance are on the rise. Michael Kitces, who writes the Nerds Eye View Blog, has written a very good summary on the state of play regarding risk tolerance questionnaires in his article: The Sorry State of Risk Profiling Questionnaires for Advisors.

Michael articulates various risk factors in distinguishing between tolerance, capacity and perception. Likewise, for advisors using Financial DNA, addressing the differences between tolerance, capacity and perception is very clear. And these users are provided with the structured framework in which to do it.

Then there is how the risk profile is used. In goals-based planning, where the client has a portfolio designed to achieve buckets of goals, there may be multiple risk profiles. Given that there are different goals, the risk tolerance of the client must be known and the framework outlined and applied.

Many advisors believe that risk tolerance can be determined by observation or casual interaction. However, these methods are neither objective nor validated. Relying on the advisor’s perception of the client under preset circumstances (in a comfortable office or out for a meal) opens the door to a myriad of pitfalls. The advisor is influenced by their own risk profile and biases, which removes objectivity. The client, while self-reporting, may not be faced with the pressures of considering a volatile market or other life-changing event, which would alter decision making or goal-setting, again removing objectivity from the equation. Also, not using a validated psychometric risk profiling process means that the advisor does not have a consistent process for handling the risk conversation with the client. This further leads to discolored results, and not just for a given client, but across the entire firm.

While current regulations do not specify that a validated psychometric process must be used, it is the direction in which we’re headed. If the firm wants to have a robust process of mitigating client complaints and maintaining compliance, these tools provide the solution. Plus, as Kitces points out, it is not just the tool itself, but also the planner’s behavior and skill in deploying the tool that is important.

Conversely, some advisors state that they do not wish to bother a client with more paperwork, so they do not have them complete a risk questionnaire. But experience shows that the addition helps keep the focus client centered during the planning process, plus the client feels more engaged because they’ve participated at a higher level. So it becomes a service quality enhancement, which deepens the advisor / client relationship and ultimately leads to greater revenue.

Next, the discussion turns to the design of the actual risk tolerance questionnaire – “right data in, right data out”. Kitces is right (as is Plan Plus), most tools are inherently flawed for many reasons, and many purport to be something they are not. The questionnaire structure is important to the outcome, and must follow an accepted psychometric model.

Our view is that all of the risk profiles (even the validated ones) use situational based questions – that is, the client could respond to the questions differently depending on any one (or combination of) market or personal events, attitudes, feelings, perceptions, education etc. While this template provides a basic baseline profile, it does not provide the most accurate or effective insights as to the emotional state of a client. Daniel Kahneman, psychologist known for his extensive work in behavioral finance and decision making, details our “Level 1” automatic decision-making style as when we are under pressure or how our baseline, “hard-wired” instincts will drive decision-making. So unless a clients (or your own) Level 1 style is known, it is impossible to build a long-term portfolio, as it will be emotionally incompatible. So the questionnaire has to be designed to uncover this Level 1 behavior – free from personal or situational bias. The Financial DNA design does just this and the validated results are accurate and constant over time.

Whats missed in all of this is risk tolerance being only 1 dimension of a clients financial personality. There are several more factors to consider within the broader field of behavioral finance in order to fully understand the decision-making biases of both the client and advisor. Not communicating these biases only creates more risk to the client / advisor relationship, decision-making, goal-setting and overall compliance. So, the risk discussion is not complete without knowing the clients full set of behavioral biases and knowing how to communicate on the client’s terms. And this is why it is so important that the questionnaire design must be objective, robust and validated.

One thing for sure is, the regulatory process will not go backwards. And in today’s competitive and complex world, costly client complaints will not go away. But, on the positive side, those advisors who are investing in building client centered and compliant processes have the upper hand. So, invest in a stronger “Know Your Client” process, as what is good for the client will be much better for the advisor and firm too.

 

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