Even the best clients can make irrational decisions that could derail an investment portfolio that took years to build. Learn strategies to help.
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Even good people make bad decisions. The client who invests $8,000 in a late night TV real estate scam; quits a lucrative career to join in an ill-advised business venture; or has an out-of-control spending habit. When fueled by emotion or bad advice, the best clients can make irrational decisions that could derail an investment portfolio that took years to build.
Today's clients are exposed to a steady stream of anxiety-stoking news sources and social media, making it more important than ever for investors to have the guidance of a skilled advisor who can guide them through emotional ups and downs.
“They're concerned about what they're seeing in the headlines,” said Lance Harshbarger, a CERTIFIED FINANCIAL PLANNER™ professional and Behavioral Financial Advisor with a practice in Overland Park, Kansas. “They're concerned about the integrity of their overall plan, and a Behavioral Financial Advisor is able to help them step back, get control of those emotions, remind them of why the plan exists and walk them through a credible process, so they're making wiser decisions.”
While the basic tenets of Behavioral Financial Advice have been around for decades, the principles have gained traction in recent years as advisors see more clients reacting to market volatility and changes to the global economy. Also, in light of regulations such as the Department of Labor's fiduciary rule, many advisors are incorporating behavioral financial advice into their business model as a way to increase their value.
When dealing with an emotional or anxious client, advisors should be prepared, be professional and position themselves.
Be Prepared: Take a moment to recognize your own thoughts, feelings and emotions around the topic or situation at hand. Recognize and acknowledge both yours and the client's emotional states.
Be Professional: Listen empathetically, acknowledging the client's emotions even if you don't overtly agree with them. This encourages you, as the advisor, to respond in a calm, professional manner.
Position Yourself: Assume an expert leader role. Don't fall into the client's emotional dilemma. Lead them rationally through the situation. Work to gain a clear understanding of the issue and what it is the client wants to do. Discuss all options before making a decision, allowing clients to make a rational, not emotional, decision.
Behavioral financial advice is an on-going process, beginning on the first day of the client-advisor relationship. It's about helping them make logical and rational decisions, compared to emotional and irrational decisions. It helps them become more reflective, rather than reflexive. The real goal is to help them make decisions with their money that won't undermine their goals, values or beliefs.
“Investments are critical. I don't want to undermine that,” said Harshbarger. “But what's important to the success or failure of any individual family is not whether they owned mutual fund A over mutual fund B. It's their behavior as an investor that's ultimately going to determine whether or not they make it to the destination they have in mind with their retirement plan.”
About the Author
Kirk Hulett is executive vice president of strategy and practice management at Securities America. He is a leader and consultant for the Practice Management Group, which provides consultation to investment professionals on how to improve the efficiency and profitability of their practice. Kirk leads Securities America's human resources functions and serves as the firm's chief strategy officer.
Securities offered through Securities America, Inc., member FINRA/SIPC, Lance Harshbarger, Registered Representative. Advisory services offered through Securities America Advisors Inc. Lance Harshbarger and Securities America are separate entities.
