Review Your Review

By now, you probably have received the performance numbers for the first quarter and are in the midst of setting up your appointments for your client reviews. Before you have your first client meeting, take a step back and ask yourself the following questions: “Do the reviews I conduct instill confidence in my clients? Do they see me as a performance promiser or as an advisor? Am I sharing my knowledge with my clients or just reporting on numbers? Am I meeting the clients’ expectations?

In other words, do clients see the value you bring to the table? Two things typically must occur for this to happen during the client review: 1) You must maintain control of the meeting; and 2) Your clients must remain focused on their long-term goals.

This is much easier said than done. The biggest obstacle we face is not the unpredictability of the markets, but how your clients are affected emotionally.

Maintaining control of the review is key in a situation where irrational human behavior affects the investor’s decisions. If these irrational behaviors are not managed, they could derail the client review session and impair the client’s ability to move forward with an appropriate portfolio strategy.

In our May 2006 article, “Profiting by Behavior,” we discussed clients’ irrational behavior and its effects on the markets. In this article we will focus on clients’ emotions or human behavioral biases that could cause problems during the client review.

These behaviors can never truly be eliminated, but we can identify the framework and tools that may help you manage them.

Your client’s behavioral biases are not always obvious. Get your clients talking and carefully listen for sources of irrationality:

• Underestimation of the range of
• Potential outcomes
• Over- or underreaction to the markets
• Faulty reasoning
• Unrealistic expectations
• Short-sighted decisions

Three of the most common irrational behaviors to be aware of are overconfidence, anchoring, and recency. By managing these behaviors, both you and your client should see enhanced success.

Overconfidence and anchoring

The overconfident client is one who is more confident in his ability to control the markets than in the process or plan developed to achieve long-term goals. The client may let emotions dictate his investment decisions. Generally speaking, this is a bigger problem for men than women.

One way to rein in an overconfident client is to apply structure to the meeting for both you and your client by using an agenda.

An agenda sets the tone and provides a great source of discipline. It can be easy to dismiss the importance of meeting agendas but, if used correctly, they can be extremely beneficial to both you and your client. A “best practice” tactic is to send out the agenda a few weeks before your meeting.

Clients who may be anchored are looking at the prior returns of a company, fund, or market value as their definition of success. For example, a client will overly rely on the past as a prediction of future earnings, and is less likely to be swayed in her beliefs no matter what new information comes out.

The problem with anchored clients is that many times they have unrealistic expectations. To avoid anchoring and help manage expectations, you need to have an easy-to-understand process for manager and fund selection. We suggest using the “four Ps,” for reviewing, retaining and firing. These four Ps cause the discussion to be about the “fit” in the overall portfolio as opposed to the specific benchmark. The four Ps are:

People–key personnel from portfolio manager to internal sales representative;

Process–clear and articulate decision-making process;

Philosophy–well-defined and articulate management style and suitable for respective client needs;

Performance–Is it explainable? Was the performance different from its benchmark and peers? Have the managers taken on more risk than necessary to achieve that return?