• Trust in experts. Some clients have a deep respect for the skill of active managers and may be more interested in specific strategies to manage risk. Others who are more skeptical about active management may be a better match for buy-and-hold index funds.
Anticipate Pitfalls, And Reinforce Productive Behavior
Once you have a better appreciation of how client goals, risk tolerance, and emotional style intersect, you’ll be better able to anticipate their likely investing pitfalls and develop proactive strategies to curb them.
For example, low-composure, low-risk clients may be prone to loss aversion, familiarity bias, and endowment. Advisors may need to invest more time in education while considering interim measures to lower reluctance to change. Low-engagement, high-composure clients with a willingness to delegate may be happy to offload decision-making to professional managers or a managed account if they recognize the limitations this may involve.
Behavioral science argues that if a client isn’t taking our advice, we may not be addressing underlying emotional issues—such as fear of loss or anchoring. We may also have failed to convince the client that change is not only necessary, but doable.
It all boils down to knowing your clients—and understanding what makes them tick as individuals. If you do, you can help them curb their self-defeating investing tendencies, encourage their positive behaviors, and add value to your business in the process.
Matthew Wilson is head of E*TRADE Advisor Services, where he oversees E*TRADE’s technology solutions, custody services and referral network for independent registered investment advisors.