“Behavioral finance has always been really important when it comes to working with clients, but I think it’s just as important when it comes to coaching advisors,” said Jimmy Lee, a managing partner at Strategic Wealth Associates.
Lee works with 80 advisors and runs the firm’s advisor training program. To be successful in their roles as financial stewards (assuming a good financial plan is already in place) he said, advisors must suppress their own emotional reactions to the market and then convince clients to stay the course, too.
Hugh Massie, president and founder of DNA Behavior International, a coaching and consulting firm that specializes in behavioral research and profiling, said that whether or not an advisor is aware of it, his own perceptions of the market and of himself can impact the client. “Particularly, the advisor’s own blind spots can play a role here,” he said.
This could be detrimental to the client’s portfolio in terms of risk or timing, because, as Massie said, the clients can “eat” the behavior of the advisor. For example,with a high risk taking advisor, clients could end up in portfolios carrying an inappropriate risk level for them. Similarly, an advisor who is particularly fearful during market downturns could end up pulling client assets at the wrong time.
“Sometimes it’s hard as an advisor to separate your own emotions from the client,” Massie said.
However, Massie and Lee both said this is an issue that isn’t talked or written about enough in the financial advisory industry. “We spend so much time in this industry training these advisors on products and financial concepts, and we don’t spend nearly enough time on the advisors themselves when it comes to their own belief system, their own confidence level, how they see themselves and how that affects their subconscious,” Lee said.
And the client’s portfolio performance isn’t the only thing at stake if advisors don’t manage their own behavior. According to Lee, an advisor’s productivity is deeply connected to his self-confidence and how the advisor sees himself. “I think it’s just as important for client performance as it is for advisor productivity,” he said.
To help advisors succeed, Lee said, trainings must also focus on advisor behavior because it trying to help an advisor become a high producer isn't effective if he can’t envision that. “So we have to peel back the onion a little bit and focus on the foundation of who these advisors are and how they see themselves, today and in the future,” he said. “And if they want to see themselves differently, can we help them with that in a positive direction? How can we help them perform better and execute on their goals.”
At the end of the day it’s a lot about confidence, Lee said. The more confident advisors are, the more comfortable their clients will be with the plan they’ve worked on. As far as coping with emotional investor behavior, advisors must work to manage client expectations from the outset and remain confident in the plan when the clients want to deviate.
Massie agreed that confidence plays a big role in a successful advisor-client relationship. “It’s confidence in yourself, it’s confidence in the strategy, in the markets, but also confidence in the clients and how they are going to behave, which is about getting the clients to understand themselves and to balance out their own emotions and irrationality,” he said.
To avoid advisor behavior pitfalls, advisors must be aware that their behavior could impact their clients in a negative way, Massie said. “The more that the advisor has an understanding of themselves and an understanding of the client, the less likely it will be that these problems come up,” he said.