Save your Clients from Themselves









Whether you’re helping your clients accumulate or preserve their assets, making rational recommendations based on the numbers can be the easy part. To really get it right, you might want to trade your CFA for a PsyD. That’s because, for many investors, emotional behavior, particularly during times of market stress, can subvert the best-laid plans. In fact, it’s spawned an entire subspecialty: behavioral investing.

Vanguard research, for example, reveals that in periods of volatility, the cool head and soothing words of an advisor can add 150 basis points to an investor’s return over time.* Left to their own devices, investors tend to panic and sell rather than seek professional advice. This can often mean selling at exactly the wrong time and scrambling to get back on board when maybe they shouldn’t.

It’s also been shown that investors who ignore their statements fare better over time than those who regularly check them. Checking in means tinkering, and tinkering often means disrupting a plan that’s working just fine.

A recent piece by InvestmentNews Research and Great-West Financial** identifies four other common behavioral pitfalls:

Distorted feelings about gains and losses. Most people tend to be loss averse, and for your glass-half-empty clients, this can put a significant damper on gain. For your overconfident clients, on the other hand, the tendency may be to take undue risks. So for the exact same probable outcome, you may want to accentuate the positive to the former – 75% chance of market appreciation this year (based on historical averages, say) – and caution the latter about the potential downside – 25% chance of negative returns.

Saving too little. The nation’s low savings rate versus other developed countries can be mostly explained by two financial behaviors: “anchoring” and “confirmation bias.” Anchoring sets a norm in one’s mind that’s difficult to move. If saving 5% or 6% of one’s income sounds realistic early on, individuals resist a change to that number, whether it’s higher or lower. Confirmation bias says that people are especially attuned to – and even seek out – information that supports their beliefs. So that if 5% or 6% is the number investors believe to be correct, they’ll find evidence to support it and reject evidence to the contrary.

Overcoming pressure to spend. “Temporal discounting” is the tendency to place a greater value on present gratification and less on the future. Much of the time, clients don’t even consider how much they may be spending annually on what seem like small expenditures. A morning cappuccino, afternoon snack run, evening drinks out with friends; they can all add up over time. Helping investors see how much a small change in spending can result in significant increases to their nest egg over time can help change behavior.

Falling back into old, bad habits. Thanks to what behavioral researchers call “habituation,” people tend to discount or ignore messages they’ve heard repeatedly. Kind of like the surrounding noises you no longer register when you’ve lived somewhere long enough. Individuals often revert to behaviors that are habitual and feel comfortable and familiar. Changing up how information and advice is delivered can keep it fresh and impactful. Similarly, a new and different voice of authority can bring refreshed credibility to the tried and true. Finally, reinforcing positive behavior and acknowledging progress can be the best way to ensure more of the same.

* Putting a value on your value: Quantifying Vanguard Advisor’s Alpha®, Vanguard Research, September 2016
** The road to retirement success: Understanding – and overcoming – your clients’ behavioral biases, INReserch and Great-West Financial, 2017