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.