Advisers are like doctors: Meir Statman

At NAPFA conference, behavioral finance expert says, 'Treat your clients like kids'

May 19, 2014 @ 9:23 am

By Liz Skinner

NAPFA, practice management, portfolio management, behavioral finance, client servicing
+ Zoom

Advisers should think of themselves as financial physicians, a role that requires them to pay attention to both the wealth and the overall financial well-being of clients, behavioral finance guru Meir Statman told advisers on the final day of the spring NAPFA conference in Salt Lake City.

Care of clients should include providing financial education, prescriptions for the right investments and treating the human emotions and tendencies that can lead them down the wrong financial paths, Mr. Statman, a professor and chairman of the finance department at Santa Clara University, said Friday.

"Teach them the science of investment markets, but also the science of human behavior," he said. "Show them when fear can be useful and when it does harm."

The three-day National Association of Personal Financial Advisors conference focused on how advisers can use behavioral finance research to help clients avoid investment mistakes. Linda Leitz, an adviser and chairman of the fee-only advice group, called Mr. Statman the "rock star" of the NAPFA event.

Mr. Statman, author of "What Investors Really Want" (McGraw Hill, 2010), directed advisers to help clients get over hindsight and regrets about mistakes or missed investment opportunities. Point out that even an adviser can be affected by hindsight, he said.

"But tell them, 'My advantage is that I know, so I will serve as your teacher, and help you know and overcome those errors,'" Mr. Statman said.

If explaining behavioral issues that can lead to bad investment decisions doesn’t work, advisers will have to take a more paternalistic approach, he said.

"First educate them, then treat them, respectfully, like kids," Mr. Statman said. "Clients are not kids, but sometimes they behave that way."

For instance, clients who may want to pull out of equities during turbulent markets can be advised to "sleep on it for two weeks" or have the adviser recommend a "reverse dollar-cost-averaging approach," where the client slowly exits the market over a year, he said.

Advisers should talk to clients about their deepest hopes and fears, allowing them to "strip naked in front of you" metaphorically, like they would physically in a doctor's office, Mr. Statman said.

The personal connection that comes through such a process of listening and empathizing is an important element that separates a living, breathing financial adviser from so-called robo-advisers, Mr. Statman said.

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