Category Archives: Behavioral Finance

Around the RIA Web with Adhesion, June 2016

A few great reads from the month of June, highlighting some of the key conversations we’re having with advisors. Growth, technology, investment design, outsourcing, recruiting, compliance…all are key discussion points for RIA firms and we share the following for your own discussions:

Wealth Management writes that the SEC proposal on succession planning is officially out, requiring RIAs to explicitly adopt and implement business continuity and transition plans. For those who have yet to adopt formal policies, the cost of implementation may be substantial and accelerate the trend towards multi-advisor platforms.

The clear trend in ETFs is towards lower fees, but massive amounts of money still reside in higher-fee counterparts. As shown by ETF.com, the march will continue at its own pace with RIAs and ETF strategists the typical early adopters of lower-fee products.

EVERYONE is in the market to buy existing advisory firms. Michael Kitces shares some ideas on (too?) popular ways to find opportunities, as well some less-traveled paths and key considerations in an acquisition.

Common theme for successful outsourcing…find a strategic partner not just a product vendor. How two advisors leverage healthy relationships, via Financial Planning magazine.

The standard 60/40 portfolio has been a tough benchmark in recent years, but basic math says that will be a tough act to follow. Illustrations from EconomPic and Charles Sizemore reveal a need to blend in some alternatives going forward.

Happy clients generally means happy advisors. Julie Littlechild suggests some steps for a manageable 7 week bootcamp to deeper client engagement.

Servicing clients of all sizes is a constant battle between the hearts and minds of advisors. There is no doubt that the DOL rule will force firms to reconsider how and whether they service smaller accounts. Our clients have been on this issue long before the DOL ruling, prompting ETF Select to be included as a new investment option for Adhesion client firms.

Retail investors are often mocked as “dumb money”, but behavioral biases are just as likely to impact those human beings known as advisors. Abnormal Returns shares thoughts on how hindsight bias can creep into all of us, and how the habit of writing can be an outlet for clear planning. Michael Batnick does his part to write about hindsight bias as well, and how some market truths are merely traps.

Reverse churning is a serious issue, and Blaine Aikin thinks the new DOL fiduciary rule puts more bite into the ability for regulators to demand more documentation from firms transitioning IRAs.

As Ben Carlson shares, what a firm DOES NOT do can reveal just as much as what they do. This negative knowledge can act as a worthy qualitative filter in assessing investment managers. Pair that with this riff from Tom Brakke on man vs. machines and you’re ahead of most highly-paid investment committees.

In this world of more sophisticated number crunching, let’s not forget that market “risk” is not truly quantifiable. It is not those with the best formulas who deliver the best plans, but Phil Edwards of Mercer suggests an open and imaginative mind towards the uncertainty of the future.

Client acquisition is a real but hard-to-quantify cost for advisors. Michael Kitces had two comprehensive articles on low-cost and high-cost ways to grow one’s client base.

The active vs. passive debate is never-ending but thoughtful advisors can look with an objective lens at the merits of both sides. As Nir Kaissar shows, the S&P 500 as it currently stands is currently structured as a bet on high valuation-stocks.

There is constant competition for the attention of affluent investors. Are there aspects of your practice that are highly unique to your firm? Matt Oechsli shares 13 true differentiators for financial advisors.

No such thing as a perfect portfolio but a core/satellite approach can provide an ideal mix of cost, reward/risk, and client behavior. Deborah Fox shares some thoughts on logical blends.

Interesting insights from the Schwab Independent Advisor Outlook Study into the way different RIA firms see their business changing over the next few years.

Adhesion continues to work behind the scenes in helping advisors grow, with new options allowing the integration of Outsourced CIO implementation via Mercer and robo technology via Riskalyze. We welcome your feedback at solutions@adhesionwealth.com, and encourage you to subscribe on the upper right of this page to receive our regular blog updates.

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Around the RIA Web with Adhesion, May 2016

A few great reads from the month of May, highlighting some of the key conversations we’re having with advisors. Growth, technology, investment design, outsourcing, recruiting, compliance…all are key discussion points for RIA firms and we share the following for your own discussions:

How does an RIA differentiate in a world full of “advisors”. By casting a tighter net, NOT a wider one. A must read from Michael Kitces on connecting with one prospect vs. trying to appeal to all of them.

We all want to embrace technology in the name of “efficiency”. Smart adopters take the time to think through the larger opportunity of better allocation of resources, and the right path to getting there. HarvardBiz with a great article on the flexibility, new learning opportunities, and advancement prospects that are possible with the right human/tech combo.

Banking on expected returns carries its own risks, but the danger gets magnified when future liabilities force inappropriate investment choices. The Thought Factory eloquently explains this risk, and Ben Carlson further clarifies what can happen when aggressive assumptions take the place of hard choices.

Adding to the risks highlighted above, how can future return assumptions remain so high after an unprecedented period of fixed income returns? Wes Gray shows the historically high returns in the recent past, while Brian Portnoy highlights the risks of plugging into cheap fixed income ETFs after a multi-decade bull market.

Speaking of risk, what is it? Risk can explained in a number of ways, depending on which pundit or academic is speaking. David Merkel shares a few ideas about properly defining risk, relevant to most clients of advisors.

Josh Brown makes a compelling case for rejecting clients who want it their way. In other words, suggestions are not as valuable as advice, and neither party benefits from this type of “customized” solution. Might be a good way to get out in front of the too many clients problem.

Formal schooling is just the ante for a career in financial services. Real client-facing experience is a must in learning to deal with demanding and anxious customers on a frequent basis, as shared by Lawrence Hamtil.

Factor funds are all the rage but are not created equal. As shown by Jack Vogel, the number of holdings, weight of those holdings, and reconstitution of those holdings varies and can lead to dramatically different outcomes.

It’s always good to hear how industry peers think about running their business. A few observations in Financial Planning on enhancing the human aspects of fee-based, fiduciary advice.

Adhesion continues to work behind the scenes in helping advisors grow, with new options allowing the integration of Outsourced CIO implementation via Mercer and robo technology via Riskalyze. We welcome your feedback at solutions@adhesionwealth.com, and encourage you to subscribe on the upper right of this page to receive our regular blog updates.

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Around the RIA Web with Adhesion, April 2016

A few great reads from the month of April, highlighting some of the key conversations we’re having with advisors. Growth, technology, investment design, outsourcing, recruiting, compliance…all are key discussion points for RIA firms and we share the following for your own discussions:

Tim Harford on the compromise effect and the paradox of choice, relevant for how advisors choose investments and their clients choose an advisor.

Michael Kitces uses the context of diet and exercise to show how advisors can use small financial planning goals to help clients on a successful long-term journey. More excellence from Michael on the evolving skill set of the modern advisor.

Ben Carlson on building failure into your process, so important in developing robust investment plans. This pairs well with his post on the dual mandate of an investment advisor, that the best plan for a client is one that survives the real world.

Tom Brakke states well the obvious flaw in starting manager research with a performance screen, and Corey Hoffstein shares the additional problems with using 3 years as a lookback period. The team at GestaltU covers the perils of past performance quite well in this excerpt from its new book.

A great advisor views his/her role as one of deep relationships, personal advice, and ongoing coaching through the journey. Awesomeness from Josh Brown on The Job Security of a Great Advisor.

Our advisor clients tend to embrace the flexibility of an open-architecture platform, again demonstrated in our approach to “robo”.  Some providers have chosen a more bundled approach to advisor solutions, later requiring a messy divorce in trying to replace any specific component.

Are you marketing to a niche market, or truly serving one? Julie Littlechild neatly explains the difference.

When it comes to data, more is not always better. As Tadas Viskanta explains, comparing different eras is hard and in investing can be downright dangerous.

Josh Brown on how bad active management is being taking to task. Jake at EconomPic shows when good active management can be worth the cost. Patrick O’Shaughnessy rounds out this topic with a wonderful illustration of the difference between seeking alpha and seeking assets.

Speaking of expensive active management, ThinkAdvisor reports that the SEC is prepping a 2016 initiative on 12b-1 fees, a hidden cost of mutual funds that gets disclosed but rarely discussed.

One trend sure to continue with the new regulations is mergers and acquisitions of RIA firms. Investment News summarizes this trend, and shares good ideas on items to consider in any potential arrangements.

Speaking of new regulations, some solid advice from Russell Investments on creating, documenting, and reviewing best practices for healthy client relationships.

The consummate guide to the DOL ruling from Michael Kitces, incredibly thoughtful and no stone unturned.

JP Morgan puts out a wonderful Guide to the Markets every spring, with all kinds of fun and informative graphics.

Adhesion continues to work behind the scenes in helping advisors grow, with new options allowing the integration of Outsourced CIO implementation via Mercer and robo technology via Riskalyze. We welcome your feedback at solutions@adhesionwealth.com, and encourage you to subscribe on the upper right of this page to receive our regular blog updates.

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On Trusted Partners

We most powerfully sustain focus when we’re engaging our greatest skills, interests, and capacitiesDr. Brett Steenbarger

In boom times, investors begin to wonder if they can just “do it themselves”, buying index funds and speculating on a stock or two that catches their attention. This rarely ends well, as an objective match between risk profile and portfolio construction has not been done and reality eventually sets in.

It’s during these market shifts that the true value of an advisor emerges. Has the advisor educated clients on his or her stated investment philosophy? Aligned client goals and financial situation with a thoughtful plan? Coached them through the dual needs of conservative planning and disciplined investing?

Clients of these advisors are a lucky bunch, having found a trusted partner committed to designing a prosperous future. But how does the well-intentioned advisor, likely in demand by prospective clients, continue to deliver this level of care as business expands? The paradox is that those most capable of delivering on their promises are the ones most likely to reach capacity.

This is where the thoughtful advisor finds his or her own trusted partner, to gain efficiencies without losing the formula for personalized service that brought success in the first place. Help with planning, help with relationships, help with investments are just the start; there are also concerns about compliance, operations, and marketing that need to be addressed for a firm to remain in control of their practice.

So, what happens when chaos enters the markets? You know, the actual markets that are responsible for delivering the outcomes needed for this whole process to work? When these outcomes are under threat, whether real or perceived, even the most proactive firms can be pushed into a reactive mode as clients voice opinions and ponder decisions to adjust portfolios.

As Barry Ritholtz says here, the best strategy is the one you’re most likely to stick with, and it’s the firms with the most systematized processes that are most likely to stick to the plan. Advisors are human beings with strengths and weaknesses, likes and dislikes, and in times of chaos the weakest link in the chain becomes the process least likely to be implemented…or at least implemented well.

On days like those in late August, when supposedly liquid ETFs traded 10-20% away from net asset value, is an advisor’s time best spent updating weightings in a spreadsheet? Trying to find the best way to execute trades in a fast market? Probably not, especially with incoming calls and client-specific advice to be addressed.

The most successful advisor-client relationships are built around trust, including a trust that the advisor will deliver as promised. Not some promised rate of return, but delivery of a) an investment plan in line with the client’s risk profile, b) ongoing monitoring and implementation of said plan, and c) coaching along the way to keep the plan intact. While the client may not realize just how much effort goes into each of those steps, the thoughtful advisor considers each aspect and creates processes to enforce the required discipline.

It’s easy to see how a strengths-based approach to building an organization can foster the healthiest of advisor-client relationships. As a partner to RIAs, we see the most growth among firms who have properly matched their personalities with their duties, and leveraged technology and other human specialists to round out their service model. For advisors using a specialist to deliver personalized investment models, wild market swings are simply an opportunity to speak with clients while leveraging the resources of a partner to run their playbook in the background.

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The Perils of Hindsight, the Power of Client Regret and What Really Matters to Clients

Sometimes perfectly intelligent clients do very stupid things. So says ThinkAdvisor in an article honoring Daniel Kahneman as part of its 2015 IA 35 for 35. Since 2007, Kahneman has been the Eugene Higgins Professor of Psychology Emeritus and Professor of Psychology and Public Affairs Emeritus at Princeton University. Known as the “father of behavioral finance,” he received the Nobel Prize in 2002 for economics. Kahneman continues to work with advisors. At the IMCA New York Consultants Conference in February, he told attendees that clients are “more sensitive to loss than gain,” and that “people aren’t concerned about their level of wealth, but about changes in their wealth.” He also pointed out that “people don’t like giving up things,” even if they’ve only had them for a short time.

As an example, Kahneman discussed an experiment he conducted with behavioral economist Richard Thaler where one group of people was given mugs and the other some money. Those with the mugs wanted on average $7 to sell their mugs, but the other group was only willing to pay an average of $3. This is what is known as the endowment effect, where “people often demand much more to give up an object than they would be willing to pay to acquire.”

Adhesion implements behavioral finance throughout its UMA solution. Through the use of behavioral-driven profiling tools, advisors can determine their clients’ degree of engagement, risk tolerance and emotional pre-disposition. By understanding their clients’ behavioral traits advisors can then design output specifically for an individual client. Advisors can also take advantage of Adhesion’s behavioral-driven proposals. These are templated proposals designed to de-emphasize relative performance and emphasize the benefits of total solution. You can incorporate a description of your firm’s Philosophy and describe your firm’s service model. Adhesion also offers behavioral appropriate models. A pre-configured investment program can take away the emotional aspect from investing and guard against emotional investment behavior. Finally, Adhesion provides behavioral-driven client management. Advisors can setup their client portal with data access that reinforces a client’s specific behavior type.

Check out our webinar, “An RIA’s Guide to Behavioral Investing,” to learn more.

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Your Value and What Clients Are Willing To Pay For

The title of Norb Vonnegut’s recent Wall Street Journal column poses a crucial question: “What Are Financial Advisers Worth?”  To answer this question, advisors need to determine how they define the value they bring to clients above and beyond investment returns.  In other words, why should clients pay your fees when they can get comparable returns from a robo-advisor?.  As the conversations around these issues evolve, the answers may not be as clear-cut as you think.

Defining the value an advisor brings to a client isn’t easy.  To quote Vonnegut,

“How do you assign a dollar value to the many services that advisers provide: Teaching a client’s child the difference between stocks and bonds?  Arranging a low-cost margin loan to finance a home or business expansion?  Or saving a family millions in estate taxes?” 

Even more profound is the personal relationship element that allows advisors to temper their clients’ emotional reactions to a tumultuous market.  Vonnegut: “I’m not sure it’s possible, or even desirable, to quantify the No. 1 intangible of private wealth management—and that’s trust.”  This is a great point.  But for better or worse, the conversations around wealth management are changing.  Now, you are more likely to hear about “performance and the drag of high fees on investment returns.”

This shift in focus on advisor value is very evident in what we are seeing from “robo-advisors.”  Out of them, Betterment is having a fair amount of success, managing $1 billion for 50,000 clients.  Betterment recently sent out an email as part of its onboarding process that stated: “Investing with Betterment can be expected to return 4.3% more than a typical DIY portfolio, and over the past decade, would have outperformed 88% of portfolios managed by investment advisers.”  While Vonnegut disputes the 88% figure, this is possibly the most influential robo-advisor taking square aim at the value advisors are providing.

This begs the question: how can advisors continue to charge for investment management services when clients can purchase them for a fraction of the cost?  The answer lies in the value that traditional advisors can provide that robo-advisors cannot: a uniquely personal and human client experience.  However, it’s important that the robo-advisor trend not be dismissed out of hand as an option for just small accounts and younger investors.  The disruptive impact of lower costs for as good or even better investment results is being felt across the boards.  We all saw a similar disruptive effect on the brokerage business with online trading and other tech innovations.

Vonnegut asked Betterment CEO Jon Stein and their Director of Behavioral Finance Dan Egan what robo-advisors do when the market’s down, the time when personal service and relationship are most important.  Betterment clients received regular communications, and could log onto an app to see whether they were on track for their long-term financial objectives.  There was also real-time feedback on changing tax impact.  While Egan admitted that “Tech is not close to replacing the human,” he also claimed that “they are best together.”  The partnership between tech and a human advisor is a big reason behind the launch of Betterment Institutional.  This product lets traditional advisors use Betterment’s portfolio management service while retaining control of client relationships. For this, Stein and Egan suggest charging 0.50% or 0.60% of AUM.  To Vonnegut, these 50-60 basis points “sound to me like a service fee for human input.”  These are real dollar amounts defining the “human” value traditional advisors bring to the table.  While Vonnegut acknowledges that hard numbers are good for clients and therefore the wealth management industry as a whole, they will also “increase the pressure on traditional advisers as the dollar cost of service is negotiated down over time like everything else.”

With assigning dollar amounts to what was once an intangible value a real possibility, advisors will be under even more pressure to find ways to lower costs while giving clients reasons to stay.  One solution is outsourcing.  An InvestmentNews article, “When technology or outsourcing can help, and when it can’t,” points out that many of the fears advisors have when it comes to outsourcing are misplaced.  Since software solutions and outsourcing can only act based on advisor input, their output can be easily customized for both advisors and clients.  As for price, the article states: “can anything be called expensive if it helps efficiency, saves more labor dollars than it costs and allows for greater revenue without increasing overhead?”  Outsourcing and software let advisors focus on “mission critical” functions like meeting with clients and marketing and business development.  This gives advisors the opportunity to define the “personal” and “human” value they are providing, so that when the times comes to negotiate for these services clients can see what they’ll be paying for.

An outsourcing platform like the one offered by Adhesion Wealth Advisor Solutions lets advisors have the best of both worlds.  Adhesion is a personalized UMA, meaning that advisors can take advantage of a powerful outsourcing solution while retaining and enhancing the “human touch” they give their clients.  Here, technology and human are definitely not mutually exclusive.  By delivering essential investment services, Adhesion creates efficiency that allows advisors to save money and lower fees while increasing profit margins.  Flexibility and customization help advisors deliver their own unique investment and business models.  The result is significantly more time and resources to devote to improving the overall client experience.  Ultimately, the personalized UMA model offered by Adhesion helps to garner new business and emphasizes the true value that an advisor is adding.

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Retirees’ Hindsight is Also Great Advice

The hindsight of those who have come before us is an invaluable resource for planning our own futures.  An October article by Morningstar.com, “In Hindsight, Here’s What Retirees Wish They’d Known,” asked readers on their Investing during Retirement discussion board what they wish they had known when they first retired.  These are great insights for both advisors and investors to incorporate into building retirement plans.  And it’s not just a matter of investing nuts and bolts.  Many of these retirees regret anxieties or worries, or were led to make poor decisions due to being influenced by these kinds of emotions.  Advisors can play a determinative role in helping their clients to weather market turmoil and personal uncertainties.  Taking into account some of the thoughts below is a great start.

According to a National Endowment for Financial Education poll cited in the article, “half of all U.S. adults say that having enough money saved for retirement is their number-one financial goal.”  Retirement is at the front of almost every investor’s mind.  But is the classic investing wisdom sufficient when the unexpected happens?  As Morningstar points out, investing for retirement ideally means positioning a portfolio to be successful regardless of market conditions.  However, even the most financially savvy retirees could not have anticipated how bad the 2008 meltdown would be.  Here are a few lessons the Morningstar readers took away from the experience.

One retiree decided to concentrate his portfolio into a real estate investment trust after 17 years of smooth sailing.  The only problem was that he made this move in 2007.  When the REIT market “went bust” following the events of 2008, he took a huge loss.  These days, his “first mantra is diversification.”

Another commenter from the board who retired early 2009 in the midst of the recession said that he wished he’d known the market was just beginning to start a bull run.  An opportunity was missed and much anxiety could have been avoided.  Others referenced earlier catastrophic events they could have foreseen.

One commenter retired in 1999 “just in time for the dot-com bust, 9/11, the 2008-09 financial meltdown, etc.”  In retrospect he said that continuing to work would have mitigated some of the damage.  He also recalled that in 1999 he had the opportunity to put everything into long-term bonds at 7.5%.  He calculates that had he done this he and his wife would currently have hundreds of thousands more in their portfolio with much less stress.

Several retirees said they regretted taking their Social Security too early, since the longer you wait to begin benefits the more the payout is.   Others felt that they had covered their investment bases, but neglected to take into account the financial implications of healthcare costs.

Here’s what one commenter had to say about the Fed: “I wish I had known that the Fed would sacrifice savers for the dubious benefits of trying to ‘control’ the economy. Keeping rates low for such a long time has made it very difficult to buy new (and safe) CDs as older, higher-yielding ones [pay] off. What else is there for very conservative retirees?”  Another simply wished that he had trusted his process more and known “that I could sit back, relax and trust my calculations. I wasted a year worrying about not having a paycheck every two weeks. Now I regret working that last year. I’m not rich, but I can do what I want when I want to. Or do nothing. It’s a whole different mindset.”

One retiree had a very positive message, saying that he wished he had known “how well it would work out.”  He and his wife had lived below their means, stayed debt free outside of a house mortgage and saved 10% from both salaries for their retirement in well-researched mutual funds.  Now he tells his kids, “You can have it all.  You just can’t have it all right now.”

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Imagine A World Where Your #1 Job is NOT Making Money for Your Clients

It’s always interesting to get a “consumer-eye view” of what we do as financial advisors.

In a recent CNBC article, Seth Streeter makes the case for a different kind of wealth management and the disciplines that come along with that.  His arguments resonate.  For one thing, there is no question that many Americans today are running short in the inspiration department.  As Seth rightly points out, not only does money not necessarily correlate with happiness or feeling inspired, it too often comes with its own set of obligations and headaches.  As Seth puts it, “The truth is, most Americans feel a great disconnect with their money.  Many don’t realize how their relationship with it could empower them to pursue their highest priorities and purpose, rather than make them feel stuck on a gerbil wheel of obligations.”  In other words, advisors should consider shifting to what Seth calls “inspired wealth management.”  Or what we would call adding Alpha.

“Your financial advisor is in a unique role to be a change-agent, but think about your last meeting with your financial advisor.”

Like Seth, we believe that while a financial advisor is in a unique position to make a significant positive impact on the lives of clients, many are not realizing this potential.  Seth states that, rather than talking only about portfolios and financial planning, an advisor should be helping clients focus on “career fulfillment, family health, marriage satisfaction and personal life purpose planning.”  We’re talking about a shift in the way wealth is viewed: not simply as a net worth figure or sum of assets, but a means to an end.  This is more about the human capital elements than just a financial statement. The end here is not a never-ending accumulation of the More, but an inspired, purposeful life that encompasses a variety of factors.  Financial advisors who help clients achieve this goal will not only see overwhelming client satisfaction, but will likely feel more satisfied in their own career.

Seth’s “inspired wealth management” is an ideal way for advisors to add Alpha to their client relationships.  As we’ve said repeatedly, with robo-advisors and DIY solutions readily available to consumers, advisors who want to continue to grow their market share have to be providing clients with value beyond investment returns.  Inspiration is a great way to start.

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An RIAs Guide to Behavioral Investing, Part III

The Adhesion Platform: Incorporating Winning Behavioral Investment Strategies

In case you missed it: Part I and Part II of An RIAs Guide to Behavioral Investing.

Greetings and happy holidays! We hope you are having a fruitful and not too stressful holiday season, and wish you and your families all the best in 2014. We began this series discussing the basics of Behavioral Finance, and more importantly, how it applies to you and your business.  Last week we covered behavioral investing types (BITs) and behavioral biases.  Understanding BITs is essential to effectively countering client bias.  To completely capitalize on your new insight into clients’ behavioral biases, however, takes a platform with open architecture and resources to spare.  With Adhesion you can construct for each client an individualized investment program that is truly tailored to their objectives and the specific ways they process information and weigh risk.  Adhesion’s open architecture lets advisors allocate assets any way they want, using a menu of pre-configured behavioral-driven portfolios or you can design your own.

The Adhesion platform isn’t just flexible; it powers a comprehensive behavioral solution that covers you from top to bottom.  To start, Adhesion offers a combined behavioral and risk tolerance questionnaire for client profiling.  You are also provided with client proposals specifically designed to present information in a format that’s consistent with the client’s BIT.  Additionally, the Adhesion platform gives you on-going performance reporting that is presented in various formats based on BIT and accessible to clients via the client portal along with reporting delivered directly to the advisor.  Let Adhesion help you truly take advantage of behavioral-driven investing by creating client relationships that run on information and communication, while accommodating and diffusing emotion and volatility.

Click here for a replay of the Adhesion webinar: “An RIAs Guide to Harnessing Behavioral Investing”

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An RIAs Guide to Behavioral Investing, Part II

Understanding and Applying Behavioral Biases and Behavioral Investing Types

Click here for Part I of An RIAs Guide to Behavioral Investing.

Last time we discussed the basics of behavioral finance: what it is, why you need to be utilizing it, and how we can help.  Let’s get down to the nuts and bolts.  Barrett Ayers sums up the importance of planning for client bias when he unequivocally states: “Understanding your client’s behavior types is just as important as understanding their investment objectives.”

The foundation of behavioral investing is the up-front profiling of clients according to the four Behavioral Investing Types (BITs), and using that information to communicate with clients about their investments in a way that intrinsically makes sense to them and inspires trust.  The four BITs are: Passive Preservers, Friendly Followers, Independent Individualists and Active Accumulators.

Each category encompasses a set of attributes and tolerances that walk advisors through what their clients are thinking when they make a rash investment decision or balk at a reasonable proposal.  For example, the Active Accumulator (AA) is an engaged, highly risk-tolerant and emotionally driven investor who has probably experienced a great deal of financial success in a specific field.  Their accomplishments tend to convince AA’s that the more control and influence they have over a process or decision, the more likely it will be successful.  In other words, if they can control all of the inputs they can control the outputs.  This is referred to as the “illusion of control bias.”  This client will often actively push the advisor for changes to the investment program, particularly if nothing is happening or things aren’t happening fast enough.  The advisor in turn can now understand why the client is trying to exert this control and respond appropriately (in this case by refusing to capitulate). At the same time, the Active Accumulator must be allowed to feel generally that they have influence over the process.  This will be essential to maintaining a long-term relationship with a client who is this BIT.

The illusion of control is just one example of how, by proactively identifying and planning for how to manage the specific biases that will likely arise, this client relationship will become exponentially stronger and long-lasting than it would be otherwise.

Click here for a replay of the Adhesion webinar: “An RIAs Guide to Harnessing Behavioral Investing”

Click here for Part III of An RIAs Guide to Behavioral Investing.

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