The Behavior Profile

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Are you a perceptive financial advisor? Being able to identify your client’s financial decision-making and investment style is important in communicating effectively with them.

Research in the relatively new field of behavioral finance confirms the influence of emotional reactions to financial decision-making. According to the October/November 2009 edition of Morningstar Advisor, in order to become an effective financial mentor, advisors need to conduct a thorough interview with clients.

The goal of this interview is to: identify their traits; determine risk tolerance; identify behavioral investor type and biases; and tailor advice to client’s behavioral type. Those professionals that embrace this approach and are willing to become “experts” in client behavior, will not only have the knowledge to be more successful in guiding clients to make sound financial decisions, but will clearly have another tool for maintaining their competitive advantage.

For advisors, knowing whether a client is cognitively or emotionally influenced in their financial decision-making can create an effective approach for client discussions. Being able to explore your clients’ perceptions on money, will enhance your ability to guide them to not only make sound financial decisions consistent with their goals, but help you address their particular needs and concerns more appropriately.

The Heart vs. The Head

Regardless of the content of a decision, there are some critical response styles that affect how we decide. When evaluating your clients’ decision-making process, the first concept to consider is whether they are emotionally or cognitively influenced. Do they generally make decisions based on their “gut reactions” or are their decisions empirically based? Both styles can potentially be difficult for the advisor unless you understand strategies for interacting with each style effectively.

The Emotional Investor

Emotional investors can be challenging because they may not initially respond positively to rational explanations of your recommendations. They also may be difficult to manage if they’ve experienced losses and may be resistant to basic investments principles, such as diversification and asset allocation.

However, once they feel comfortable discussing emotional issues with their advisor they will spring into action. Sometimes so much so that they’ll want to alter their portfolios as market conditions change. This can also be unduly influenced by high risk investments that their friends or associates recommend. Despite this, emotional investors can become your best clients because they value professionalism, expertise and objectivity. The best approach is to take control of the situation by demonstrating the impact that financial decisions have on their lifestyle, their family members and the family legacy.

The Cognitive Investor

Cognitive investors can potentially create a challenge because they often follow advice from friends and colleagues about investment decisions. They want to be in the latest, most popular investments, without regard to a long-term plan or the risk of entering an investment that is peaking.

They can be overly influenced by the “talking heads” on financial news shows. Advisors must recognize that this type of client also tends to overestimate their risk tolerance. They don’t like situations of ambiguity that may accompany a decision to enter an asset class when it is out of favor. They also tend to say yes too quickly and then regret their decisions later.

In working with cognitive decision makers it is important to collaborate with them, instead of directing them. Advisors should back their recommendations with data. Since their biases are cognitive, a steady educational approach on the benefits of portfolio diversification and sticking to a long term plan are effective. This will generate client loyalty and adherence to investment plans. Cognitive investors are usually grounded enough to listen to sound advice when it is presented in a way that respects their independent views.

Five Financial Behavioral Styles

After acknowledging your clients’ general approach to decision-making, the next step is to explore their individual histories and learn about their approach to money.

In my work with advisors, I’ve found that one of the following five behavioral styles usually reflect a client’s approach to their monetary decision-making: Financial Initiators, Financial Analyzers, Financial Collaborators, Financial Avoiders, and Financial Dreamers.

There are also four primary behavioral characteristics that differentiate these client types from one another: independence, knowledge, confidence and initiator vs. avoider.

Financial Initiators: They are self-assured, empowered and optimistic in most of their endeavors. They ask sophisticated questions, but chances are they have already researched some of the answers. They are extremely knowledgeable and thrive on the power to understand financial solutions and make financial decisions. They will want to make an informed choice about the financial professional they engage, based on credentials and depth of experience. As an advisor, it is important that you are confident explaining in detail the basis of your financial recommendations and comfortable collaborating with them on final decisions.

Financial Analyzers: They have a good understanding of household finances and take initiative in thoroughly researching investment opportunities and tracking results. They have good, basic questions and are financially knowledgeable enough to understand possible solutions and implement decisions. They are comfortable with the power of making financial decisions and are analytical and disciplined in their approach. When working with them, it is important to set clear goals and acknowledge their desire to be an active part of the process. They need to feel both independent and in control in order to feel comfortable working with you as an advisor.

Financial Collaborators: They are extremely balanced in their life and provide their family with financial comfort and stability. They are cooperative and trusting in their relationships. They ask intelligent questions and are capable of understanding solutions.

But, they prefer not to be the primary decision-maker. If they are married or in a relationship, they will promote their partner, and are comfortable creating the illusion that they are “taken care of.” As their advisor, don’t make the mistake of under-estimating their financial intelligence or independence. Be sure to indicate your respect for their role by speaking with them often and including their input in all important financial decisions.

Financial Avoiders: They are concerned about their current finances and financial future. They will ask enough questions to create overwhelming anxiety for themselves, but don’t feel confident or knowledgeable enough to explore issues in depth in order to create solutions or make an informed decision. They also are easily intimidated and often overwhelmed. They can be unrealistic in their expectations and as a result can be a “blamer” and view themselves a victim when things don’t go they way they would like. As an advisor, you need to educate them in a non-threatening way and guide them through financial decisions.

Financial Dreamers: They have never expressed the confidence or desire to take control of their financial world. In fact, they expect to be taken care of by those around them and are resistant to being independent. They are in denial about financial realities and think everything will be fine because “it just has to be.” Their refusal to address financial issues in a responsible manner results in an immature approach to money and investing. They avoid unpleasantness at all costs, and are unlikely to ask questions or seek the services of an advisor. Should you become their advisor, you must be willing to invest time to develop become a trusting, mentor for the outcome to be successful.

When you understand the factors that drive a client’s financial decision-making process, it enables you to create a plan that addresses their particular values and needs. Take a moment. Think about one or two of your key clients. Finally, consider which profile best describes them and how their history, values and concerns might influence their financial decisions.


This article was originally published On Wall Street.

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