Helping clients overcome emotional biases

Your value to clients grows exponentially when you can help them focus on a long-term approach

Jan 16, 2019 @ 2:19 pm

By David Patchen

Last year marked the 10-year anniversary of the financial crisis and the resulting Great Recession. Advisers who were in the business a decade ago remember emotional and panicked calls from clients wanting to exit the market, fearful they might lose everything. Some of those clients who sold, and perhaps hesitated to reenter the market, were paralyzed by the emotional and financial toll they experienced in 2008-2009.

Since then, we've seen reminders of how emotional investing can be for clients, especially given the market volatility since early October. In short, investors remain concerned about their portfolios and what any market drop might mean for their financial plan.

Your value to clients

Over the past decade, your value proposition to clients has increased. When some veteran advisers began in this business, clients needed to call for stock prices. Now investors can receive constant stock updates via their phone, TV, internet and social media. Some rely on news headlines to paint the picture for them. According to a study commissioned by Raymond James, nearly seven in 10 investors admit that news headlines play a significant role in their financial decision-making.

The fact is, investing can be emotional, even for clients who feel they channel the utmost objectivity when it comes to their investment decisions. Nearly half of investors who self-identify as "savvy" and 42% of "calculated" investors admit that emotions are extremely or very influential factors when it comes to their investment decisions.

But investing shouldn't be emotional. Your value to clients grows exponentially when you can help them overcome their emotional biases and focus on a long-term approach.

(More: Finding the right nudge for your clients)

Common emotional biases

Mental accounting: Clients with mental accounting tendencies often focus on the details, but may miss the big picture. Empower these clients to come to you for quick check-ins whenever one bucket of funds or investments experiences short-term spikes. Proactively reach out to them ahead of bonus or tax refund seasons to share tips for spending wisely, saving or investing an incoming money flow.

Familiarity: Clients with familiarity biases tend to stick with a particular stock or strategy because it's what they know. Encourage them to look beyond the company name or product to understand the underlying characteristics and expand their financial fluency regarding solutions with which they may not be as familiar.

Overconfidence: Overconfident clients may come to you with instructions, rather than questions, on what they should do next. Use gamification or financial planning software to have them test the cause and effect of the solution they are suggesting, and show them how your process compares.

Loss aversion: In market downturns, you likely hear the most from clients with loss aversion, particularly those who remember their losses during the recession. Encourage them to concentrate on moving forward, rather than dwelling on the past. Help them focus on long-term market growth and realize that market sell-offs and corrections are normal and are generally temporary speed bumps on the path of market growth.

(More: When markets fall, will your clients remain calm or panic?)

Give their gut feelings a gut check

Clients can sometimes lose track of the clarity your planning process provides. Some questions you should ask clients who call in a panic:

1. What are you hearing or seeing that caused your concern?

2. What do you think we should do based on this concern?

3. What impact might this decision have on your current plan and goals we have in place?

4. How much of what we should do is in response to the markets versus your particular plan or goals?

These questions can help you approach clients' emotional biases delicately, while achieving your goal of uncovering their emotional biases. Being a good listener and asking the right questions can lead to a valuable discussion about the differences in your process, how you gain clarity around financial decisions in specific environments and ultimately, how you can be their source for objective financial advice.

(More: Expanding field of behavioral science provides key insights for advisers)

Use gamification

After comparing your process for gaining clarity, use gamification tools like financial planning software to test scenarios and show clients how their decision will likely affect their long-term financial plan — before they implement any knee-jerk reactions. Such software can display the hypothetical result of overreacting, giving in to biases, or not having a clear process.

It's more than just a deflection tactic. For some clients — particularly those who may be overconfident or loss-averse when it comes to their financial decisions — seeing is believing. Using technology and software to show them how their emotional bias might derail their financial plan and keep them from achieving their goals can be the key turning point in restoring their confidence.

David Patchen is senior vice president for Private Client Group education and practice management at Raymond James.


What do you think?

View comments

Recommended next

Upcoming event

Nov 19


New York Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print