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Investment Success Based on Client Behavior as well as Portfolio

Helping HandThere’s an essential aspect of investing that, most likely, neither you nor your financial planner have been trained to see: Your long-term financial success is based less on the structure of your portfolio than it is on your ability to adapt your behaviors to changing economic times.

An increasing number of financial planners are awakening to the fact that our primary business is not producing financial plans or giving investment advice, but rather caring for and transforming the financial and emotional well-being of our clients. And at the very foundation of financial and emotional well-being lies one’s behavior.

I’ve come to understand this over my own three decades as a financial planner, so I was pleased to see the topic of investor behavior featured at a national gathering of the National Association of Personal Financial Advisors (NAPFA) in Salt Lake City last May. One of the speakers was Nick Murray, a personal financial advisor, columnist, and author.

He told a group of 800 planners, “The dominate determinants of long term, real life, investment returns are not market behavior, but investment behavior.” Murray told us, “Put all your charts and graphs away and come out into the real world of behavior.” This made me recall similar advice from the 2009 Financial Planning Association’s (FPA) Retreat, when Dr. Somnath Basu said, “Start shaking the dust off your psychology books from your college days. This is where [the financial planning profession] is going next.”

Most advisors will agree that, while meticulously constructed investment portfolios have a high probability of withstanding almost any economic storm, none of them can withstand the fatal blow of an owner who panics and sells out.

This is where financial advisors’ behavioral skills can often pay for themselves. Murray, who calls financial planners “behavior modifiers,” reminded us that we are “the antidote to panic.”

Murray said most advisors will try everything they can do to keep a client from turning a temporary decline into a permanent loss of capital. However, he wasn’t optimistic that the natural tendency of investors to sell low and buy high will stop anytime soon. He asked us to think about clients who may have panicked, not just during the market crash in 2008, but several times since. Then he asked, “How many times have they gone out on the ledge and tried to jump, and how many times have you pulled them back in?”

His final advice was blunt. “I am telling you as a friend, stop wasting your time on these people. Save your goodness and your talents for those who will accept help from you.”

I have certainly learned, often the hard way, that trying to help people who aren’t ready to change is futile. Yet I disagree to some extent with this part of Murray’s advice. If clients have “gone out on the ledge,” more than once, but have called me and accepted my help in “pulling them back in,” then together we have succeeded in modifying their behavior.

I would see this, not as a “waste of time,” but as a successful use of the behavioral coaching that is one component of client-centered financial planning. This is a far different scenario from that of a panicked client who refuses help by ignoring or rejecting a planner’s advice and skill.

Supporting clients’ financial and emotional well-being often requires financial planners and clients to learn from each other and work together over the long term. If planners see ourselves as “antidotes to panic,” we need to realize that, for some clients, the antidote may have to be administered more than once.

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One Response to Investment Success Based on Client Behavior as well as Portfolio

  1. Joanne and Gary December 16, 2014 at 12:16 pm #

    Trust in our planner and staff plays a large role. We trust you all to keep our assets secure and listen to our needs and wants. Thank you for this commitment to us for the past 20 years.