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Financial Planning > Behavioral Finance

The New Advisor-Client Paradigm

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Much has been written about the need for advisors to regain their clients’ trust, and to engage their clients in a more meaningful and deeper way through the application of behavioral finance principles, in order to strengthen their relationship.

But in this new paradigm, what about advisors themselves? How do they really fit in?

According to Joseph Jordan, senior vice president at MetLife, advisors, too, took a big hit during the financial crisis, and many lost their self-confidence and motivation. Just like their clients, they also need to regain trust, but they need to regain trust in themselves and in their profession, and in the new way of approaching their client relationships, he says.

“After the crisis, many people in this profession have faced a great deal of rejection and this has resulted in low self-esteem,” Jordan says. “The only way to recover from this is to focus on the positive things that advisors do in their profession. Most advisors still get talked to in terms of compensation and compliance, but they need to know that it’s much more than that. They need to really understand the positive things that they do in their profession and to know that it’s not all about compliance, it’s about making a connection with someone.”

Jordan believes that the end goal of using behavioral finance principles to better the financial advisory profession applies to both clients and practitioners.

“We have to create a behavioral environment, a culture that enables people in this profession to think beyond themselves and to make those connections with their clients,” he says. “This in turn will, of its own accord, address the compliance issues that advisors are always hearing about.”

According to Jordan, much of the debate surrounding behavioral finance and how it applies to the financial advisory profession has been centered on consumer advocacy. But financial professionals need both inspiration and a reaffirmation of their faith, he says, to make behavioral finance really valid. To this end, Jordan travels around the globe to speak to financial advisors in order to motivate them and get them to realize the importance of their role. He believes that firms need to do this on a regular basis in order to get advisors to “buy into” their part of the behavioral finance paradigm, and so they understand that their greatest asset is the bond they will form with their clients.

That bond is based on the understanding that clients take action based on emotions, feeling and experience, Jordan says, and that people want to buy a thinking process, not just a product. Advisors need to be part of that process.

To this end, one of the most important things financial advisory firms need to do is to develop tools or methods that provide simple guidelines–and not necessarily the ultimate answers–for their clients, because “the idea is to drive awareness about the retirement income risks and guide clients to their own decisions,” Jordan says.

In emphasizing the importance of behavioral finance as part of a firm’s modus operandi, it is also key that practices make this a clear-cut part of their process and vision. According to Natalie Doss, research manager for consulting firm Quantuvis Consulting, advisory firms that make it a priority to define their goals and vision have a greater chance achieving professional success.

“If a firm truly believes that sitting with clients and having deep conversations with them to find out how they feel, think and act is important, then all advisors need to be on the same page,” Doss says. “If you have advisors who are not on the same page, you are potentially losing leverage as a firm.”

Quantuvis has just come out with a new study sponsored by Genworth Financial that is part of a series on best practices in the industry and looks at the importance of human capital, or the way financial advisory firms hire, manage, compensate and advance employees. Advisory firms that make an effort to invest in human capital, the study determined, are the ones that do better from an overall business perspective, and the top 25% of advisors in the study, as measured by owner income, outperformed their peers in all financial categories and also demonstrated superior performance across metrics related to their firm’s human assets.  

“Firms that focus on human capital can leverage their advisors and enable them to focus more on human relationships,” Doss says. “

Human relationships are at the heart of behavioral finance and how it applies to the financial advisory profession, yet Doss says, “few firms realize that time is the greatest asset an advisor has, and the more time an advisor has, the better they can perform.”


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