Why Consider a Client’s Emotions When Advising Them?
Investors often face high-stakes decisions that must be made quickly. They need to understand complex terms, gather data from multiple sources, and make choices that are not only suitable for their situation but also financially beneficial. It's only natural that emotions come into play, especially when markets are as volatile as they have been recently.
In a recent interview with AusBiz, CFP adviser and Director of Steps Financial, Antoinette Mullins, discussed the importance of acknowledging emotions and fears when advising clients and how to manage these factors effectively.
Why is it Important to Consider a Client’s Emotions When Advising Them?
"Making decisions from an emotional place isn’t necessarily bad," Antoinette explained. "In this digital age, we are overwhelmed with information and need a way to process it all to make timely and effective decisions. Emotions often help us do that, but we must also recognise that they can lead to biases that we need to be aware of."
The 2023 Value of an Advisor Report by Russell Investments found that behavioural coaching by financial advisors could improve client portfolio performance by up to 3.4% per annum. This demonstrates the significant impact of advisors helping clients avoid emotional mistakes by understanding their mindset and fears.
For example, a client who has previously lost money due to a bad investment or market downturn might panic when encountering negative headlines, thinking, "This is the same; I need to sell out immediately." This reaction is known as availability bias, where investors base decisions on information or experiences that are most readily available or memorable, whether from recent news or past events.
How Can Advisors Help Clients Recognise and Overcome Their Biases?
"One effective strategy is to engage with clients when markets are stable," Antoinette advised. "This is a good time to educate and empower them when emotions are not running high, allowing reason and logic to guide their understanding."
At Steps Financial, we focus on three main strategies to build a robust framework for clients:
Aligning Investment Goals with Client Values: Understanding what matters most to the client ensures that investment strategies are aligned with their personal priorities.
Applying Risk Benchmarks Reflective of Client Behaviours: This involves tailoring risk assessments to account for both rational and irrational behaviours, ensuring they are aligned with the client's goals.
Improving Client Financial Literacy: By educating clients on market dynamics, we help them make informed decisions and reduce the impact of emotional biases.
In scenarios where availability bias is evident, such as when a client is influenced by past losses, it’s helpful to revisit those past experiences to understand why they happened. By analysing the market conditions and portfolio decisions from that time, clients can learn to assess future situations more objectively, ultimately increasing their financial literacy.
Additionally, it’s crucial to listen to clients carefully. If a client’s asset allocation causes them anxiety and keeps them awake at night, it clearly doesn’t pass the "sleep test." Advisors should be prepared to challenge client views when necessary but must also respect their fears and adjust financial plans accordingly to reduce anxiety.
Understanding the Importance of Aligning Investment Goals with Client Values
Goals-based advice has traditionally focused on helping clients reach specific objectives, but there’s often not enough emphasis on values-based advice. "Our values are the unwritten rules that guide our decisions and priorities in life," said Antoinette. "To provide truly personalised advice, we need to dig deeper into the 'why' behind a client's goals."
For instance, a client might want to work less and spend more time with their family. While this sounds reasonable, understanding why this is important to them might reveal deeper motivations, such as wanting to be more present for their children due to their own childhood experiences. By understanding these underlying values, advisors can offer advice that not only meets financial goals but also aligns with the client's personal values.
The Role of Soft Skills in Financial Advising
Advisors are not typically trained in analysing emotions, but these soft skills are crucial when dealing with clients who have had negative experiences with money or investments. "We’re not psychologists or counsellors, but understanding client emotions can help us guide them more positively," Antoinette noted.
Ensombl and Innova Asset Management recently published a White Paper on how behavioural biases should influence portfolio construction—an insightful read for those interested in this topic.
Active listening is a great starting point—truly listening to understand rather than just to respond or solve a problem. Sometimes, clients aren’t fully aware of why something matters to them, and it's up to the advisor to help unravel these reasons by asking deeper questions. For example, instead of asking, "Tell me about your investment experience," try asking, "How did your previous investment experience make you feel?" Such questions can lead to more meaningful insights and better-informed advice.
At Steps Financial, we believe in treating each client as unique, fostering authentic connections, and guiding them towards a financially secure future that aligns with their dreams and values. Whether you see us as your fairy godmother, financial superhero, or secret weapon, we’re here to help you secure your financial future.
Recent interview with AusBiz.