• Acknowledge emotions. Rather than assuming the role of the “expert” and jumping in with logical arguments, listen to your client’s concerns and then mirror them back so the client feels heard. This can help reduce emotional reactions and make a client more receptive to advice.
• Focus on the big picture. Every client has a “touchstone” that drives them to invest and exchange short-term rewards for long-term security—maybe it’s a satisfying retirement, starting a business, or helping their child avoid college debt. Once you know that touchstone, you can return to it during critical situations, showing how different choices could bring the client closer or farther away from their ultimate goal.
• Change the frame of reference. While investors tend to focus on one-year returns in normal times, anxiety during volatile market periods may shorten their frame of reference to daily or even hourly market performance (Source: “Behavioural Finance Matters.” (n.d.) Barclays Research). You may be able to ease frayed client nerves by shifting the focus back to long-term returns—for example, show charts of five-year (or longer) rolling returns, which will smooth many of the shorter-term bumps in the road.
Understanding A Client’s Emotional Needs And Risk Tolerance
Because a person’s attitude toward risk can be shaped by everything from childhood experiences to their profession, advisors need to work directly with clients to better understand how they really view the trade-off between risk and return.
While risk surveys and risk-tolerance tools may help determine basic investment preferences, they’re not necessarily strong predictors of how clients will react when market volatility is high, or as loss aversion becomes stronger. Because investors often have difficulty weighing hypothetical trade-offs, consider combining questionnaires with face-to-face discussions about downside risks and priorities that are more relevant to a client’s specific situation and background (Source: Ibid).
Understanding a client’s “emotional style” may help you anticipate some of their potential investing blind spots. Barclays, for example, outlined several emotional styles and the types of investor behavior they imply (Source: Barclays, “Overcoming the cost of being human: Or, the pursuit of anxiety-adjusted returns,” March 2013):
• Engagement. High-engagement clients take an active role in researching investments and monitoring performance, which can translate into a heightened focus on short-term market movements, especially when anxiety is high. At the other end of the spectrum, low-engagement investors may be less reactionary, but also less aware of the need for regular portfolio rebalancing.
• Composure. Low-composure investors are more emotional and may be very anxious when markets are volatile. High-composure clients, by contrast, may be better at keeping a long-term perspective, but harder to pin down for regular portfolio check-ins. But remember, even high-composure investors might can potentially lose their cool during prolonged periods of market volatility, or if they face stresses in other areas of their lives.
• Need for action. Some people respond to stress by becoming more deliberate, while others are driven drive to act. Advisors may be able to address the reluctance of deliberate investors to act through counsel and strategy. For clients who lean toward action, you might consider incremental portfolio changes to accommodate their need to “do something.”
• Willingness to delegate. Some investors require greater control over their investments, especially in stressful market conditions, and it may be harder for them to delegate decision-making to their advisor. This tendency can carry risks if investors aren’t aware of their blind spots.