As in the medical world, in the financial world we are dealing with individuals, each one unique, each one presenting different scenarios and unique solutions to those scenarios. Medicine and biology are to doctors what finance and psychology are to wealth managers.
Taken as a whole, it may be rather daunting for advisors to consider the endless possibilities they may be presented with when taking a client’s financial life into account. However, it is reassuring to know that if we add certain principles of psychology to the equation, we can apply some order to the inherent chaos. We can begin to understand, to get to the root cause of various issues — external and internal forces that together define a person’s path forward and cause them to take financial action — sometimes positive, sometimes not.
Scenario 1: The Adult Child
Life is finite. We are afforded a certain amount of time on Earth, and then we die. Perhaps the greatest comfort to us as we contemplate our eventual expiration is that if we’re lucky, we will live on by way of the legacy we leave behind — our children. Therefore, is it surprising that we will make irrational decisions regarding money when it comes to family? No. But, if we delve into various scenarios and the motivating factors regarding the financial decision makers, we can perhaps more effectively help our clients navigate these choppy waters when we inevitably enter them.
In two of the scenarios we discussed during focus groups with advisors, a spouse had passed away, leaving the remaining parent alone and in the position of having to assist adult children. Paying off huge credit card bills, or reaching out under the auspices of “doing it for the grandchildren,” were just a sampling of the various scenarios at play here. In another scenario, the adult child chose a career path that is very hard to sustain financially: flipping houses. In asking for support, the “child” was putting the client in a tough spot because as a retired postal worker, there was not a lot of retirement breathing room.
The advisor is put into a challenging position here — you must offer good financial counsel, but often that advice runs counter to the emotional pull clients experience toward their offspring. We uncovered many potential motivating factors on the client’s side; chief among them was the fear of losing another family member or leaving behind a failed family legacy. Guilt for not getting the child in a position to lead a financially stable life plays a potential factor, as are the need for familial stability and love.
Scenario 2: Incommunicado
Advisors are often faced with the disconcerting experience of clients suddenly cutting off communications. In one case we explored, the 80-year-old client suddenly cashed out a variable annuity and would not return calls or emails. Another bought a terrible index annuity and also subsequently refused to discuss it. One called their advisor to argue about asset allocation, and the advisor was shocked to hear their co-worker chime in mid-discussion supporting a bad decision. In every case, the advisor was left to wonder: Where did I go wrong? How did I not convey my value properly? Could anything have been done differently?
In these scenarios, we identified a two-way street of culpability. First, the advisor needs to evaluate their approach to client relations and communication. In any service business, if you are not speaking to your clients, you should assume someone else will fill that void. When you are effectively selling air, or the intangible, one of the few tangible offerings you have at your disposal is your ability to connect with clients on a personal level. External forces will always be applying pressure to your client relationships. Advisors must also understand that what they do is complex — complexity and the unknown are fear factors. When you have a client who is unclear on what you do, how you do it or why they should value it, you are destined to lose that relationship.
Scenario 3: Black Hole
Sometimes, despite their best efforts, advisors cannot break through to clients. They can be incredibly out of touch with the realities of what can be done for them and what cannot. One tell that indicates a client might be difficult to connect with is the number of previous advisory relationships they’ve had.
An advisor we spoke with took on a client who had previously been with four other advisors. Now, they could just be terribly unlucky in their choice of service providers, but the odds indicate otherwise. Despite this red flag, the advisor took them on, only to show the client the door not long thereafter.
In other scenarios clients demand liquidation of IRAs despite being counseled that it’s a bad idea. Some refuse any counsel at all, as when a husband (in this case an attorney) refuses to take advice, thinking he knows more about finance than the person whose sole job it is to manage money. Tension and mistrust in a marital situation can lead to one spouse viewing the advisor’s role as counter to their priorities. If one spouse enjoys spending money beyond their means, they are likely to take counsel advising against such behavior very badly.
In these types of scenarios, we identified certain common characteristics, such as the need for control, or an overconfidence in one’s grasp of things as possible root causes. Clients who are professionals, such as attorneys, doctors and the like, are either going to see another professional (the advisor) across the table and heed his or her sound advice, or play the role of the foil, challenging at every turn.
Scenario 4: The Wounded Bird
Another scenario advisors often experience is a prospective client limping in from having been taken advantage of or having had a poor experience with another financial services professional. These clients are going to be jumpy. Experience with other advisors aside, clients sometimes just need extra care and attention. One client had come to an advisor having lost her husband when she was very young. He had been hit by a car, paralyzed and then subsequently committed suicide. Her parents died when she was 16. She had money to invest, having inherited quite a bit, but having been through a lot, straight-up “investment advice” wasn’t going to cut it, and that needed to be acknowledged.
In all situations, it is imperative for advisors to acknowledge that human behavior and experience shapes clients’ relationships with money, and their relationships with advisors. Clients may come in thinking they know it all. They may come in having had terrible experiences with others. Life is complicated, and people accumulate a great deal of psychological baggage along the way. People are susceptible to what others think, some much more so than others. People have varying degrees of weakness when it comes to temptation. Life is messy. Unlike cash, people do not fit neatly into a box.
Advisors should not simply consider whether an understanding of basic psychology as it pertains to behavioral investing is important to their businesses — they need to acknowledge that it is vital. They need to ask themselves: What helps create trust in clients? How can I become more effective at reading and reacting to clients, thereby establishing rapport? It is excellent to have a process and protocol for advising clients, but it should be implemented knowing that there must be flexibility based purely on human tendencies. Advisors can take comfort in this — in fact it gives them a keen advantage versus algorithms incapable of making the human connection.
In part three of our series, we will explore the client side of things as we deepen our understanding of investors, their behaviors and how to help advisors more effectively help clients.
— Read Part 1 of this series: It’s Complicated: Exploring the Advisor-Client Relationship.