Removing emotion from clients’ financial decisions is easier said than done, but Susan Owens, senior vice president at Lenox Advisors, says there’s a playbook for turning these feelings into a well-crafted plan.
“We talk about market volatility and how clients can maybe make bad decisions or feel very reactive when the markets are volatile,” she told InvestmentNews. “But I think equally as important are when clients go through life events, that can be equally as powerful to create a reactive or emotional reaction.”
This, she explained, could be a positive life event, such as having or adopting a child or getting married or something that's very unexpected, like a bereavement or dealing with somebody with an illness.
Charlottesville, Virginia-based Owens was a vice president at Osaic prior to joining wealth and insurance advisory firm Lenox Advisors as senior vice president, financial planning, last year. She has been a CFP since 1993 and has racked up a wealth of experience during her career, which has encompassed spells at First Command Financial Services, USAA, and UBS.
Lenox Advisors has seven office locations across the U.S. - New York City, Chicago, San Francisco, Los Angeles, Baltimore, Delray Beach, Fla., and Stamford, Conn. The company has 310 employees, including advisors.
Research suggests that emotions could account for about 90% of financial decision making.
Set against this backdrop, advisors must carefully navigate both client emotions and their financial needs. “What the client really wants is somebody to know them and their context and be able to bring those resources and strategies and solutions to them at the right time in their language in a way that connects with them emotionally,” said Owens.
Other figures in the wealth management industry have discussed the challenges posed by emotion when it comes to building financial plans. Michael Conrath, managing director and chief retirement strategist for JP Morgan Asset Management recently told InvestmentNews that, while retirement planning can feel overwhelming, separating “the math from the emotion” is key for advisors as they build successful strategies for their clients.
Owens also acknowledges the emotion-based hurdles that may need to be overcome. One recurring theme is risk, whether the level of risk somebody is willing to take in the markets, or in risk management strategies. It could even be an aversion to simply implementing a plan in the first place, she explained.
“Sometimes you have people that don't want to make decisions,” Owens said. “Where you can see that crop up a lot, especially with people with newer families, is estate planning, not wanting to do a will, because that means I have to pick a guardian for my kids – and so you get people that just get stuck in that space.”
“It's those kind of things, like ‘who's going to be the beneficiary’ playing out, life circumstances where risk factors are involved, and maybe they're just not ready to make those choices,” Owens added. “So things go undone – and I think that can be really challenging.”
Fear can also be a big factor in behavioral finance. Research released earlier this year by the University of Mons in Belgium that studied eight management students in a three-day trading simulation cited fear as the most significant emotion, particularly when linked to financial losses.
Unsurprisingly, after this year’s geopolitical turmoil and market volatility, CNN’s Fear & Greed Index, which aims to gauge stock market behavior, is currently in “fear” territory. However, this is an improvement from earlier this year, when it was squarely in “extreme fear” territory.
So, what can advisors do? “It's really the advisor there helping them sort through what are my priorities and then breaking down how you can attack those, and then more importantly, making sure that the clients take action,” Owens said. “A plan is lovely, it's great, but if clients aren't acting on it because either they don't trust their advisor or they don't fully trust themselves, then they're really stuck,” she added.
Tackling emotions in a constructive way can bring big benefits. Last year, Vanguard’s Advisors’ Alpha research found that advisors can serve as “emotional circuit breakers” for their clients, with behavioral coaching adding significant value to longer-term investment outcomes.
Owens uses a story from her time at UBS to illustrate the importance of a strong advisor/client relationship. “We had done a financial plan for a very successful New York City executive, and it was a great plan - he was very happy,” she said. “Six months later, he was laid off, which was very unexpected.”
The first phone the call the executive made was to his financial advisor, who wanted to update his plan so that he could navigate forward with his family “emotionally calm and confident,” according to Owens.
“That's, to me, the power of financial planning … we're going to put a game plan together and we're going to help you get things done,” she said. “Because the advisor has listened and has built that trusted relationship, a client is confident calling and saying ‘I need to figure this out’.”
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