When Good Clients Behave Badly

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Is it difficult for your clients to take financial action? Are they responding to your guidance? Do you have clients who are initiating behavior such as insisting that you sell or liquidate all of their assets, and are they basing their decisions on their own irrational thinking, instead of your advice? And of the clients who have remained in the market, do you find that they are afraid to commit to financial planning principles that worked in the past such as diversification or asset allocation?

Despite these tumultuous times, most advisors with whom I have spoken over the past several months are feeling cautiously positive about market conditions. They are ready to move forward and are encouraging their clients to take action. Unfortunately, not all of their clients are interpreting the environment the same way, nor are they experiencing the same level of financial confidence. What accounts for these differences in perception? Why is it that regardless of the facts or information you give clients, some will behave unpredictably and irrationally? And more important, as their financial advisor, how can you help them see reason and change their behavior accordingly?

Psychologists have long understood that most people have a propensity for irrational thinking. A form of cognitive behavioral therapy called “rational emotive behavior therapy” was established in the late 1950s by psychologist Albert Ellis. It offers practical solutions and provides a protocol for behavioral change in non-clinical populations. The basic concept is that the environment is, in fact, neutral. It is our perception of our experience that determines our behavioral reaction. We interpret the current environment based on our past experiences. You may have 10 clients who appear to have similar financial situations, but most likely, they each will respond differently to your advice, based on their past experiences. Furthermore, unless you learn the details of how and why they think the way they do, you will be ineffective in helping them to make financially rational decisions.

As Easy as ABC

Understanding the ABCs of behavioral change is essential to helping clients overcome emotional responses to the vagaries of the stock market. The model suggests that adversity may not be the sole contributing factor to emotional and behavioral reactions or consequences. In fact, what people believe about the adversitymay be equally or more significant. Therefore beliefs are the most important aspect of the ABC model. If you can modify someone’s beliefs, then you can modify their reaction or consequences to the event, ultimately creating behavioral change.

The key to helping your clients behave rationally is to help them identify and unravel some of their irrational beliefs.

A financial team that I coach described a situation with a client that clearly illustrates how this cognitive restructuring process might work. Mrs. Martin, a 68-year-old widow, had become increasingly distressed over the past 18 months, expressing extreme levels of fear and concern about “losing everything” and becoming destitute. These fears, although real for her, were not grounded in fact. Her house is paid for, she has no debt and it is highly unlikely that she would outlive her funds.

However, on the advice of friends, acquaintances and news analysts, Mrs. Martin expressed a desire to liquidate her entire portfolio and place it in an illiquid investment. Her financial advisor of 10 years felt this was a very inappropriate decision and would not be in her best interest.

He initiated a meaningful dialogue that addressed Mrs. Martin’s beliefsthat influenced her decision to sell. She disclosed that her parents had grown up during the Depression and money was limited. Her father continuously lost jobs and the family moved often and lived with various relatives.

She remembered the tearful fights her parents had regarding their inability to pay bills. As a result, she had difficulty feeling financially secure, regardless of how much money she had.

After a lengthy conversation that included educating Mrs. Martin about the reality of her current financial situation, as well as acknowledging the validity of her feelings, her financial advisor was able to help her shift her thinking to a more rational approach.

Finally, they came to a mutually agreed-upon plan that was not only fiscally sound, but also took into consideration the client’s concerns.

When speaking with a client, the goal is to ascertain not only their personal history but their current irrational fears. Cognitive behavior therapy suggests that there are three basic irrational beliefs that influence most people:

  • The need to be perfect and achieving at all times;
  • The need to please and be liked by everyone you interact with on a daily basis;
  • The need to live absolutely stress- and hassle-free at all times.

According to Ellis, the extent to which these beliefs may be problematic for your clients depends on whether these beliefs, when compounded by adversity, tend to contribute to frustration and discomfort, intolerance, self-pity, anger, depression and to such behaviors as procrastination, avoidance and inaction.

Understanding the basis of your client’s irrational thinking lies in asking the right questions and challenging their unreasonable assumptions. But, experts underscore several core concepts to keep in mind prior to initiating a meaningful conversation with clients in an effort to dispel their irrational thinking.

  • Irrationality is independent of intellectual ability. All human beings show evidence of irrational thinking and beliefs.
  • Irrationality occurs despite teaching rational thinking. Many of the irrational behaviors we exhibit are in opposition to what our parents, peers and the mass media tells us.
  • Irrationality occurs despite individual efforts to challenge it. We often adapt new irrational beliefs after relinquishing old ones.

The significant takeaway is that insight alone will rarely enable people to escape their irrational thinking and behavior. They may feel better when they know how they became distressed, but it is unlikely they will make significant changes unless someone guides them to dispel their core irrational beliefs and replace them with more rational ones.

Although certain clients may never be amenable to change, for the majority of your clients, understanding these principles can potentially contribute to strengthening your relationship with them.

If you are willing to challenge your clients’ assumptions, help them understand their irrational beliefs and guide them to engage in more rational behavior, you will provide an invaluable asset to them beyond managing their money.

If you are willing to challenge your clients’ assumptions, help them understand their irrational beliefs and guide them to engage in more rational behavior, you will provide an invaluable asset to them beyond managing their money.


This article was originally published On Wall Street.

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