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Financial Planning > Behavioral Finance

The Advisor-Client Relationship: The Forces You Can't See

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– Editor’s note: This article is the fourth in a series by CLS Investments CEO Ryan Beach covering his firm’s research on advisor-client relationships. Read the first installment here.

Now that we’ve considered how cognition and biodata play their respective roles influencing investors, it’s time to look at the third and perhaps most challenging behavioral element — individual factors. To date, most of the work done in the arena of behavioral investing has centered on observable characteristics (biodata) and behaviors themselves (cognitive biases).

However, the predictive ability of these metrics is limited by their observable nature. The field of behavioral finance is currently missing an understanding of the internal, core characteristics of people who interact with these observable characteristics, to better predict how people make decisions about finances and investments. These characteristics are best described as personality traits, emotional tendencies or individual motivators.


The two primary personality models that have been investigated in behavioral finance are the Big Five personality traits and, more recently, the Myers-Briggs model. The Big Five personality traits are:

  1. Openness
  2. Agreeableness
  3. Conscientiousness
  4. Extraversion
  5. Neuroticism

The Big Five is one of the most widely used personality models across various disciplines and has shown some predictive power in investment performance, such as:

  • Extroverted individuals are more likely to make fewer investment trades than introverts, but they tend to have a higher propensity for short-term and risky investments.
  • People who score high in “openness to experience” are more likely to choose long-term investments than other investors are, and are also more open to riskier investments.
  • Investors who experience loss and are high on agreeableness or low on conscientiousness tend to have the more positive reactions and coping styles with financial loss.
  • Neuroticism, which is characterized by heightened emotional responses, anxiety and fixation tendencies, was found to be related to risk-taking, in addition to greater discomfort and dissatisfaction with risky decisions.

The Meyers-Briggs model, in contrast, considers four dimensions of personality:

  1. Extraversion
  2. Information processing (sensing vs. intuitive)
  3. Decision style (thinking vs. feeling)
  4. Preference for structure (judging vs. perceiving)

This model is extremely popular in many industries because it categorizes people into types based on their approach to different situations. Research applying Meyers-Briggs to financial decision making has shown that:

  • Individuals with a thinking decision style (preference for objective decisions and fairness) are more risk tolerant than individuals with a feeling decision style (preference for subjective decisions and congruence).
  • Those who are more sensing in their information processing (concrete thinkers) are more equipped to tolerate higher potentials for gains or losses than intuitive processors (abstract thinkers) are.
  • Intuitive or abstract thinkers tend to be risk takers.

In addition to these two main personality models, several other personality traits have been studied. But overall, the results of the limited personality research to date are inconclusive and incomprehensive, even though there is substantial evidence that individual characteristics are predictive and important in financial decision-making.

Motivation and Emotion

One of the most compelling motivational theories that applies to financial decision making is regulatory focus, which as a construct, measures the promotion- vs. prevention-oriented nature of an individual.

Typically, these orientations have both a stable, individual-level component, as well as a domain-specific component. When people are promotion-oriented, it indicates they are motivated to seek the potential for high gains.

Conversely, when people are prevention-oriented, it indicates they are motivated by avoiding losses. There is some evidence that these motivational tendencies not only predict how people will make decisions in the financial sector, but also differentiate between the types of investments people will pursue.

Other motivational constructs that have applications for financial decision making include information seeking and locus of control. Information seeking refers to behavior that investors may engage in to gather, evaluate and use information in their decision-making process.

Guidance from financial advisors is one primary source of information that investors may use, but they may also seek out information from media sources, friends, colleagues and the internet. For instance, low-information investors and “reluctant” investors both tend to prefer only receiving information and guidance from an advisor.

When they are tasked with reviewing additional information or sources of information, these investors tend to become more risk averse and are less likely to make prudent investment decisions. Conversely, investors with high-information motivation are much more likely to consult a variety of information sources, though their preference for information sources varies by typology (i.e., locus of control).


In summary, the research reviewed from behavioral finance, cognition and psychology provide us with a strong theoretical foundation for understanding investors and how they make decisions about their financial assets.

Key motivational and personality characteristics provide compelling evidence that investors differ according to several core traits that may be used to better understand how they approach financial decisions.

Key takeaways

  • Cognitive biases and behaviors are useful metrics for understanding potential causes of poor investment performance and irrational decisions; however, they are less informative in understanding what types of investors are likely to engage in those faulty behaviors.
  • Demographic information and biodata are predictive of cognitive biases, but they may be more useful as proxies for other social phenomena that influence individual behavior.
  • Personality analysis has very limited support currently, but shows promising results related to its predictive capabilities for understanding investors and investor behavior.
  • Motivation and emotional traits are among the most compelling characteristics to consider when profiling investors, although the current state of research is limited.
  • Considering the constellation of individual characteristics is the most promising method of differentiating among typologies of investors, which may facilitate understanding with their advisors in early communications.

As stated at the very beginning of this series, the advisor-client relationship is complicated, as any meaningful relationship is (and ought to be).

But by examining and working to understand investor behavior as it correlates to our biological and psychological characteristics, we can perhaps give ourselves a slight advantage when trying to understand and serve our clients’ complex needs – and that can make a very big difference.

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