“Left alone, almost everybody gravitates towards investments that have higher recent returns, but statistically that’s the opposite of what a good investor should be doing,” says Lottridge.
Once a client has made an investment decision based on a recommendation, it’s very difficult to convince them to change strategies, says Lottridge, especially if the recommendation allocates to asset classes or geographies less familiar to the investor.
“It becomes an emotional conversation with an allocation, because these clients have had good reason to be biased towards large-cap U.S. equities since 2009,” says Lottridge. “Home country bias is real. People shy away from international investments, but most people need to have international positions.”
To deal with those emotions, advisors need to understand their clients on a deep and intimate level to know where more education, attention and guidance might be necessary to combat inertia, he says.
Magson begins creating a behavioral profile of his clients during the onboarding process, gathering information over the course of two meetings before discussing how a household’s financial plan might be implemented.
“We have a discovery meeting, a data-gathering meeting and an implementation meeting,” says Magson. “When there’s friction, it usually starts at the implementation meeting, because that’s where we’re instructing them on what they need to do.”
Magson’s process begins by determining a clients’ values and principles, then exploring their financial goals. By focusing the discussion on meeting a client’s goals, and not on the solutions that will be used, Magson’s clients typically implement his advice, though he does not have discretion over their accounts.
Goals, even lofty ones, should be divided into simple achievements that clients can achieve gradually via small steps, says Lottridge.
“Often, if someone has never done any planning before, advisors will find a long laundry list of things that need to be done,” he says. “Trying to address everything all at once can overwhelm the client, cause them to pull back, which damages the relationship. Parse it for them, find them items that they can do immediately, set the stage for them and help them understand that planning is about progress, not perfection.”
If a client is able to make regular measures of progress, they’re more likely to stick with a plan, says Lottridge.