RE: Helping your client become disciplined thinkers
Some useful insights are to be found in the assigned article, "Reading Between the Lines of Investor Biases" by Michelle Bolhuis and Ned Goodman, but I did find some gaps in the recommendations for financial advisors. As such, the science and art of advising clients still is a work in progress.
Very insightful is the observation that clients can develop unrealistic expectations due to their resistance to responding to change. During the last few years, especially as the economic troubles and secular bear market have persisted, I have found clients are having an extremely difficult time adjusting their financial plans and portfolios to maintain the possibility of keeping their long-term financial well-being and goals intact.
For example, I have a long-term client who is now moving to another advisor, because, as she expressed it: She didn't like my answers any more. As she loaned her daughter a sizable amount of money (who was unable to pay her back) and as the client was unable to sell some property (due to the economic downturn), I advised her not to "lend" more money to her kids for a while and to reduce her spending on trips to let her assets have a chance to build up again. Last winter, the client wintered in Arizona (not Europe) but it wasn't as enjoyable as her other winter trips, and she wants to continue spending money on her family, and so decided my advice was not what she wanted to hear. I could see it coming, but I decided I still needed to give the client the best advice I could under the circumstances. She is smart, can do the math, but her reference point still is the original retirement plan amounts (developed more than five years ago before she retired) and projections in her head, and I can't convince her that she needs to be more careful since she has spent much more of her assets much quicker than the original plan set forth.
Another couple faces a similar situation, in which the husband (an emergency room doctor in his late 50s) wants to retire soon. However, they just pulled a sizable amount of money out of their portfolio to buy a house for one of their sons (they had wanted to buy another house for another son, but I was able to convince them it would be too much demand on their financial plan). Now they are stressed because I am advising that the husband try to work a year or two longer to allow the portfolio to build up again so it can provide the income they desire in retirement. They keep looking at their assets and are discouraged that they have declined (but their emotions overshadow the fact that they have withdrawn money; they view the account performance as inadequate). I have scheduled a meeting with them to go over their financial plan again. Somehow I have to be tender (because they bought the house for their disabled son from their heart), but I also have to convey realism somewhat firmly, and still do it without dashing the husband's hope of retiring soon.
Bolhuis and Goodman advise that clients don't always say what they actually mean, and they don't always do what they say, and so it is up to the financial advisor to "read between the lines" and help them to be "disciplined thinkers." The authors say we are to do it through commitment, discipline, integrity, energy, intelligence, and a quest for knowledge. And to be careful in outlining long-term trends. That all sounds good, but I have found that reading between the lines is no easy task. Often the only way to truly help clients is not to analyze and bring their emotional variables to their attention, but to teach them the reasonable financial direction to take, and then to lead and partner with them in that direction.
Bolhuis and Goodman recommend unemotional investment policies, such as dollar-cost averaging, as a means to avoid emotional traps. That is great advise, but just part of the picture. I have found that since reducing risk is crucial (especially during bear markets), clients also need to be educated in systematic exit strategies, not only for reducing exposure to vulnerable parts of the market, but also for taming their emotions and reducing my stress.
Last edited by hstarn
on Fri Sep 10, 2010 9:48 am, edited 2 times in total.