Dinner discussion turns informative as planners open up about behavioral finance.
Financial advisers work hard to understand their clients' goals and to create investment plans that make them a reality. But truth be told, advisers always have certain clients who don't follow through on those plans. It's beyond frustrating.
Five financial advisers discussed that woeful conclusion with me at a study group dinner on Tuesday in Florham Park, N.J. (it was sponsored by Invesco fund wholesaler Rob Larsen).
Advisers shared strategies for how they encourage clients to accept recommendations and overcome behavioral-finance obstacles. A case in point, the group disclosed they've gotten some insufferable panic calls from clients in reaction to the government shutdown.
One adviser mentioned a client who hasn't listened to his recommendations for four years, but finally “cracked” recently — and the client actually handed over another $3 million in assets.
The adviser — in addition to affording the client “extreme patience” — did two things. First, he showed the client, who was big into cash and long-term bonds, the difference in performance between his accounts and the accounts of his wife, who follows through on the adviser's recommendations to diversify.
Her accounts had risen by about $100,000. His had not come close.
“Your tuition was that $100,000,” the adviser told his client.
The second thing he did was give the client a three-page, custom investment policy statement that included details about the client's life, his risk tolerance, income requirements, etc. It also included a section on behavioral biases, where he discussed personal perception issues that could derail the client's financial success.
The adviser is currently writing these custom statements for his top 40 clients and including behavioral issues, such as overconfidence, risk aversion bias and loss of control bias.
The stubborn client read the investment statement, “did much soul searching,” and said he was ready to invest according to the adviser's suggestions.
“I mold clients into being enjoyable,” the adviser joked.
Another adviser bemoaned clients who constantly want their fees cut or are ungrateful for the services and guidance provided.
And the whole table groaned when someone mentioned a client who was an engineer. These professionals apparently often suffer from “analysis paralysis.”
All these advisers spend time with clients early in their relationships to explain the volatility of equity markets and let them know their portfolios are built to sustain some ups and downs. Nearly all clients get that, they said. But most of the advisers have a couple of clients who call them in a frenzy (and are too valuable to cast off). This week's government shutdown drew calls from those clients.
Two of the advisers had a client ask if they should sell everything and go to cash. Those conversations require the adviser to repeat calmly what's been said before: stay the course.
Advisers blame “doom and gloom” media reports that get into the minds of already anxious investors. One adviser received calls from three clients who were concerned about what the shutdown meant for their portfolios — and all of them were from Florida.
“I don't know what's being portrayed in the media down there,” he said.
One client said, “I know what you're going to tell me, but I figure I'm going to call anyway.”
The discussions prove clients really want to know that their advisers are involved, engaged and tuned in to their needs.
Have you ever been able to convince a reluctant client to accept your advice? How did you manage it?
