Know a client’s emotional biases to get through volatility

Helping clients through the volatility that seems to be the norm in today’s equity markets will require advisers to communicate carefully and be willing to send clients packing, according to behavioral finance experts.
Financial advisers need to frame investment decisions in a way that will increase the likelihood that the client will stick with their plans even when markets roil, said Victor Ricciardi, assistant professor of financial management at Goucher College, on Thursday during an InvestmentNews webcast “Behavioral Finance: Why do investors make the wrong moves at the wrong times?”
Clients suffer from dozens of investing biases that lead them to make decisions that hurt portfolio performance, including a propensity to trade too much and sell winners early and losers late. By framing an investment goal around a spending item in the future, advisers will be appealing to the hardwired nature of clients as consumers, he said.
(More: How to manage your clients’ emotions when market volatility spikes)
For instance, a suggestion of funding an annuity should be described as providing $2,000 a month after age 65 that can be used to play golf, as opposed to just saying it will provide that amount as income, Mr. Ricciardi suggested.
He also recommends advisers use personal narratives and tell clients about other clients’ successful investing experiences.
Chuck Widger, founder and chief executive of Brinker Capital, said one adviser he knows hangs photos of his clients on the walls of his office that show them enjoying time with their grandkids, flying a plane and other ways they’re enjoying their investment success.
He points them out to clients and discusses investment goals and the importance of investing to achieve that goal, rather than investing to return a certain percentage, Mr. Widger said.
In talking about investment goals, advisers should address investor biases and explain how he or she will help the client stay invested in strategies even when portfolios seem to be suffering through market dips, he said.
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“If advisers haven’t addressed emotional volatility, biases and behavioral biases upfront in the relationship, then during periods of volatility advisers can spend a lot of time reassuring and coaching their investors, time that could be better spent doing other things,” Mr. Widger said.
In fact, during a crisis is when clients tend to become most vocal with their advisers, said Mike West, chief executive of BPV Capital Management.
When a client is paying an adviser to work on their behalf, they sometimes think that adviser can control everything that occurs, he said.
“The task that advisers have is quite significant,” he said. “Advisers are called upon to be the anchor in times of crisis.”
Mr. West recommends spending the time to really get to know clients and think about them as people they’ll have to interact with in times of crisis. Observe how they react to certain topics and figure out how they are hardwired, he said.
Even consider firing clients who display signs that they could be a nightmare during volatility.
“For the sanity of the practice and happiness of both parties, let a client know if they may not be a good fit,” Mr. West said.