How do you stop your clients from blowing up their plans?
I hear the stories from advisers every day… the client who simply knows better, who knows that now is the time to enter / exit the markets or to switch asset allocations because of a stroke of genius that they have had. I’m not proud to admit it, but I have been that client too, thankfully not in the recent past.
All the research shows you, and you’ve seen on many occasions with your own eyes that more often than not this ends in failure. Clients are better off taking a long-term approach and sticking to the plan and the portfolio constructed to achieve their goals. However it’s not you that needs to be convinced, the question is how do you prevent your clients from blowing up their plans?
First of all, it’s useful to recognise and understand some of the behaviours that clients may display, that can result in significant damage.
The stroke of genius
Clients unfortunately are usually not as clever as they think they are when it comes to market timing and expected future investment trends. Experienced investors learn time and time again that time in the market is better than investment timing. So be awake to that client coming to you with a great investment idea or wanting to “tweak” their strategy where the reason is based on their instinct as opposed to the long-term objectives of their financial plan.
The herd mentality
People are influenced by their peers. We all learn a lot from them, some good, some not so good. Unfortunately when it comes to investments, your clients are better off shutting out the noise and staying focused on their own plan, listening to you as their financial expert. More often than not, you are going to prevent them from making mistakes. Listening to pals is how people ended up buying apartments in Bulgaria, borrowing to buy into already geared property funds etc. Remind them of this, bluntly if you have to. They’ll thank you later.
Recency bias
Another dangerous one for your clients. They give more weight to recent information and trends, as opposed to longer-term trends. However you know that markets work in cycles, they go up and down, but that over time stock markets climb inexorably upwards. Remind your clients of this, and just because markets have taken a bit of a dip, now is certainly not the time to sell up and run.
Loss aversion
This is a really interesting one – clients feel the pain of losing money more than twice as much as they experience the joy of gaining the equivalent amount of money. This makes your job harder – clients remember the bad days and forget the good and you bear the brunt of this aversion to loss. You need to constantly remind clients of the gains made and help them to maintain perspective of the overall picture, as opposed to the small blips along the way.
So these are a few ways in which client behaviours can result in them blowing up their plans. The question is how do you stop them from doing so? After all, this is where you can add enormous value to your clients…
First of all, you need to keep coming back to the plan and ensure your clients stay focused on their goals. Keep reminding them to shut out the noise that comes from the media, friends or wherever, attempting to drag them away from the plan. Changes in investment strategy should be driven by changes in their goals, not the other way around.
Of course it is critical to start with a well-constructed, diversified portfolio. But to most investment advisers, that is actually the more straightforward part. Whether you do this yourself or you have outsourced this to an expert 3rd party, it is important that you have a tested process that will help your clients to achieve the best results possible.
Finally, talk to your clients about behavioural finance and about the types of biases and negative behaviours as outlined above. Let them know that you’re not just making this up, that there is a real science sitting behind this! Introduce them to some of the leading experts in this field such as Daniel Kahneman, Robert Shiller and Richard Thaler. When clients understand the impact their behaviour can have, they will hopefully be less likely to succumb to displaying these negative traits. Your life then becomes a lot easier, and your clients grow their wealth without the frustration of suffering by their own mistakes.
