When advisors think of clients’ needs, it’s usually in terms of money (i.e., “Do we have enough?”) and its application to issues such as living standards, health-care planning and retirement income. It is the job of financial advisors to help clients meet these financial needs.  It’s what FAs are trained to do, and they do it well.   

These financial needs are ostensibly the point of investing. In reality they are a proxy for a set of deeper, hidden set of psychological needs, innate and universal motivators that actually drive client behavior and satisfaction. All investing decisions are attempts to meet these needs.   

Accessing this deeper level is challenging. In most cases it lies below the level of consciousness, and not even the clients are sure of the way there.

What follows is an, admittedly abridged, model for recognizing, accessing and satisfying this deeper set of investor needs. 

The Investor Hierarchy Of Needs

When you strip away all the distractions, what truly drives human behavior? The psychologist, Abraham Maslow examined this question, and in 1943 developed The Hierarchy of Needs, a theory for human motivation. If you took Psych 101, you may remember it. It has become a staple of mainstream psychology. Maslow’s hierarchy is a building-block model for behavior based on universal human priorities. Critical to the model is the notion that people are always seeking to meet needs (from “lower” to “higher”) and that until the need at one level of this hierarchy is satisfied, the need at a higher level cannot be.

The same applies for human beings as investors. The Investor Hierarchy of Needs is an analog to Maslow’s theory, specifically designed for the psychology of investing with a financial advisor. 

It may be thought of as pyramid with five distinct levels, each holding critical implications for the client-advisor relationship. Clients’ investing behavior is an attempt to meet these psychological needs, from the most basic at the bottom to the most aspirational at the top.

Level 1: Trust

Trust is the foundation of all advisor-client relationships. You cannot move forward without it. Financial Advisors agree. After 18 years of asking FAs, “What is the most important factor in client relationships?” I have never had a room tell me otherwise. 

The vital nature of trust is well accepted but not well analyzed. It is useful to think of trust not as one thing, but as three things. In a report titled Bridging the Trust Divide  (2007), State Street Global Advisors (in conjunction with Wharton Business School) identified three critical components of client-advisor trust:  1) professional expertise, 2) ethical conduct 3) and interpersonal trust. 

Trust is essentially a stool supported by three legs. If any one of these components is weak, trust collapses, along with the relationship itself. The implications for FAs are clear. There must be upkeep for all three of these principles by demonstrating proficiency, transparency and good communication. 

Level 2: Self-Approval

Here’s something about people; they really want to feel good about themselves, but they have to at least be able to live with themselves. This principle applies to investing, and compels clients to invest in a way that supports their approved self-opinions. These opinions may not be verbalized, but they are communicated, such as “I am a good parent,” “I am a smart person,” “I am socially responsible.” When investing behavior runs counter to these sources of self-esteem it creates cognitive dissonance—an intolerable state of intrapsychic conflict. 

Something has to give—and newsflash, your clients will not change their self-opinions, such as “Oh, I guess I’m not a good parent!” Instead, they will attempt to rationalize the conflicting behavior or abandon it outright. This internal battle typically manifests itself as doubt, discomfort and unexpected changes of heart.  

At its core, Level 2 self-approval is about investor values and living up to them. We must assess these values and connect them to the client’s financial decisions. One key to achieving this is to uncover not only what is important to clients, but why. “Why is this so important to you?” is one of the most effective questions an FA can ask. It produces uniquely personal rationales that can then be used as guides and linchpins for the investing decisions. This process is one of the most effective ways to connect values (self-acceptance) to investing behavior. Self-approval is probably the least appreciated factor in the hierarchy, but without this basic need being met, nothing else happens.

Level 3: Safety

The investment community likes to refer to “fear and greed” as if these two emotions were partners. They aren’t. Fear is the boss. Behavioral finance has taught us that losses have a greater psychological impact than do equivalent gains. Thus, the need for safety (i.e., freedom from fear) is the next crucial step in the hierarchy. Advisors know this, which is why risk preference/tolerance and risk assessment are integral parts of the investing process. This is where advisors’ training, such as asset allocation, risk profiling, projecting outcomes, seems most relevant. Advisors are the best means of addressing investing safety in the investing public. 

This need is so well recognized—by advisors and clients alike—there can be a tendency to skim over lower levels in order to get to Level 3. A fearful client is a “stuck” client.  But it is worth remembering there are investing needs even more basic than safety, and they always come first.

Level 4: Happiness

Happiness is the emotional return on one’s investments (eROI). Its particular manifestation depends on numerous factors, including the stage of the investing process (a Gen X-er just starting out has different criteria for happiness than does a wealthy retiree). 

There are two common mistakes at Level 4. The first is to equate performance and happiness.  They are correlated, but distinct. Investing performance is just numbers, lifeless stats. Investing happiness is the emotional reaction to those numbers and their real life repercussions.  

The second mistake is to invert the pyramid with our clients and put happiness/performance at Level 1, the basis for the relationship. Performance is ever changing and beyond our (complete) control. It is a poor foundation upon which to build. Also, while a happy client is a good thing, that happiness will not get the chance to occur, nor last very long in the absence of the more basic needs at Levels 1-3 being met.

Level 5: Purpose

There is a concept in mountaineering called the “false summit.” It occurs when a climber has reached what he/she believes is the top of the mountain—only to find that there is a higher point that was previously unseen. Enter Level 5: Purpose. 

Often investors accumulate wealth, lead lives of plenty, and encounter a puzzling question:  “Now what?” or perhaps even, “So what?” Happiness is a desirable state but does not encompass a total sense of fulfillment. That comes not from contentment, but from using one’s investment/returns for something more meaningful and perhaps eternal. Level 5 is beyond the behavioral and even the emotional; many would describe it as spiritual. Getting to Level 5 means having conversations about meaning and our ultimate purpose in this world. People’s sources of self-fulfillment differs, but for most it means using their wealth for the benefit of others.

Getting to/meeting the client’s needs at Level 5 is something psychologists strive for with their clients, but rarely accomplish. Great financial advisors do this on a regular basis. It is one of the reasons I have so much respect for the profession.

Summary

It is worth revisiting one of the great truths about investing; all investing decisions are attempts to meet emotional/psychological needs. The Investor Hierarchy of Needs is a useful model and guide for helping clients do so. Part of its usefulness is its simplicity; all deficits in client satisfaction can be traced to a problem at some level of the pyramid. The task is to identify the problem at the lowest level it appears, and work your way up. 

When you help your clients ascend the pyramid of investor needs, an additional realization will set in; the client is not alone. You are right there with them.

Dr. Frank Murtha has worked as a speaker, writer and behavioral finance consultant for 18 years. He is the co-founder of MarketPsych LLC and a principal at Marketpsych Insights. His book, MarketPsych: How to Manage Fear and Build Your Investor Identity, was named one of three “Best Financial Books of the Year” by Kiplinger’s Personal Finance in 2010.  He may be reached at [email protected].