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We are introduced to financial and economic ideas through the lens of perfect rationality. We, our clients, the markets, and all their participants are portrayed as semi-robotic economic agents, acting and reacting based solely on numbers, trends, prices, and indicators. Rational actors don’t buy or sell based on gut feelings. They don’t experience fear, hope or exuberance – they only act based on the data.
As we know all too well, human beings are neither perfect nor consistently rational, especially when our hard-earned money is involved.
Sure, our brains know that the markets trend upward in the long run, but that academic understanding doesn’t help much when you’re watching your portfolio take a hit in real time. We know that speculative bubbles exist and that they pop eventually, but how can you ignore them when the news keeps showing stories of early adopters earning millions from a couple of well-timed trades?
As advisors, our time and training quiets our animal spirits to act sensibly in tough financial situations. We’ve spent years studying every aspect of this game. We’ve watched trends emerge and dissolve, markets rise and fall, and bubbles inflate and burst; and we’ve done it from a place of privileged, elevated detachment.
Our clients have not.
Building a better client
Most of us are neither trained for nor interested in being our clients’ psychologists. Our job is to help our clients manage their wealth, not find closure. So, let’s reframe the situation. Emotional support is always going to be part of our work, but we should be particularly focused on coaching.
Behavioral coaching is an aptly named approach that lets us put our education and experience to work by imparting the lessons we’ve learned to our clients. If there’s a gap between what we know to be financially rational and what our clients want to do, let’s bridge that gap. Let’s give our clients the tools they need to make better, more informed decisions that will ultimately improve their well-being.
There are several key aspects of behavioral coaching in the advisory profession, including:
Understanding behavioral biases
Help your clients understand and recognize behavioral biases that can lead to suboptimal decision-making, such as:
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Loss aversion: We tend to feel losses much more strongly than gains – hence why more clients panic when the market dips 5% than celebrate when it rises 5%.
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Recency bias: People tend to assume recent events and trends will continue indefinitely, regardless of historical trends. For example, a market contraction will cause clients to fear prices will fall to zero.
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Herding behavior: People tend to follow the crowd. If everyone’s selling, your clients will want to sell. If everyone’s buying a bad asset, your clients will want in, too.
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Anchoring: Clients will often place an important mental benchmark on their portfolio’s peak, and will base decisions on its value relative to that peak.
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Confirmation bias: Everyone likes to be right, and people tend to look for information that supports their beliefs – whether it’s correct or not. Instead of admitting they’re wrong, people will often dig in deeper and look for sources to confirm their biases.
Emotional guidance
This is the psychological side of the approach. You will have to be the voice of reason for clients when they panic about volatility or recent losses. Talking clients through their emotions will help them avoid impulsive decisions and stay committed to their financial goals.
Goal setting and accountability
Work with clients to set clear, concrete, and achievable financial goals, then hold them accountable as they pursue those goals. Of course, goals are a crucial part of “goal setting,” but finding a way to keep clients engaged and accountable is just as important as ensuring they stay on track.
Communication
Establishing a comfortable rapport with clients, maintaining open lines of communication, and making them feel understood before you seek to be understood yourself. Clients who feel comfortable reaching out and sharing concerns are more likely to keep you around and not go off on their own.
Coaching clients to take advice
Your clients come to you because they don’t have the skills, know-how, or experience you’ve accumulated over your career. They need help with their financial lives, and creating and managing their portfolios is only part of the game. And while it isn’t technically in your job description, helping them learn how to control their emotions, avoid biases, set goals, and communicate effectively will make their lives – and your job – that much easier.
Matt Reiner is a CFA, CFP®, and partner at Capital Investment Advisors, a $2.8+ billion RIA in Atlanta. Reiner is also CEO of Wela Strategies, a sister company to Capital Investment Advisors, and is the founder and CEO of Benjamin™. Benjamin is an AI technology created by Reiner after seeing the gaps in technology used in his own firm. Reiner's true passion is using his vast experience to coach other advisors across the country, helping them evaluate their firms' practices and find the best strategies for future success. To reach Matt Reiner, visit www.MattReiner.com.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
