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Prudent Advice vs. Product: Your Client Mainstay

Over the past 27 years, I’ve watched the financial industry struggle with a system and process to engage and advise consumers in their money management. My work has focused on that challenge by trying to give investors their unique voice and tools for advisers to interpret those voices – spoken or unspoken. My first institutional presentation in 1983 was to the Securities Industry Association Board with its title, “Transforming Client Relationships from Product-driven to Client-oriented”. While I received high marks for style, the subject matter was considered too ideological, irrelevant and impractical based on feedback from members afterwards.

Here we are 27 years later and the subject matter is more relevant than ever but would the audience still feel my message was impractical for an industry built on product quotas and commissions based on results of sales of their products? I totally understand the system and its short-term benefits for business and individual profits, but I don’t understand how the industry I’ve come to know over the past dozens of years could be in such denial of the long-term implications for engendering the trust and allegiance of clients and potential clients.

My spirits were elevated this morning when I tuned into NPR, my morning wake-up call. What I heard was not only an excellent summary of the crisis of trust we’re experiencing in our financial institutions, but an attempt to design mutually beneficial solutions which a key leader of the financial industry is recommending.

Headlines are constant reminders that our crisis of institutional distrust is warranted especially with the tangible evidence of bank bailouts, executive bonuses, and record profits. It’s very difficult to find a reason to trust again in such circumstances.

But it’s an argument that Stephen Green, chairman of HSBC – one of the biggest banks in the world – makes in his new book about banking: Good Value: Reflections on Money, Morality and an Uncertain World http://www.npr.org/templates/story/php?storyId=1033

Green is also an ordained priest in the Church of England. In his book, he proposes a “new capitalism” that brings good business and good ethics together. He says moral and spiritual values should take precedence over immediate profit.

Green states that the imbalance was caused by emerging markets in places like Asia that were exporting, saving too much money and spending too little domestically. Then, consuming nations like the United States and the U.K. were spending too much and saving too little. In that context, there was a pervasive atmosphere, he says, where institutions didn’t ask a lot of questions about what was the suitable, fair or right thing to do, provided that they found a legal market for the financial product they were offering.

“When you look at the compensation practices in the financial industry there were clearly distortions,” Green says. He adds that it is “entirely understandable” that there’s widespread public anger over executive pay, especially in cases of companies that collapsed.

Perhaps if the message is delivered by a colleague and leader in the financial industry, it will be considered more practical and worthy of a valuable consideration to transform the future sales process of financial products and compensation for financial professionals.

Are Emotions Managing Your Clients’ Wealth?

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To know and understand the motivating forces behind investing, to know and understand why one investor becomes tense about losses, why one becomes greedy about profits, and why one either overreacts or fails to react is, perhaps, more than half the investment battle. There is a high price to pay for the kind of innocence many investors bring to their investments and the way they interact with their investment advisors. Unfortunately, in many cases, to help maximize your clients’ financial returns, you must first help them master their emotions.

Often, bull markets are like blinders. Investors begin to believe in the fantasy that their stocks will always take good care of them and never disappoint them. But, when reality hits and the bull market turns bear, investors can be faced with challenging decisions and their gut emotions may take over.

In my 27 years of experience, as a psychologist specializing in the psychodynamics of money management and investing, I’ve come to realize that there are certain important relationships which we must understand before we may be able to achieve a consistent degree of success in the world of investing and in the marketplace. The first and foremost of these is that the majority of losses in the marketplace result not from poor trading decisions but rather from emotional and attitudinal causes. Investing by its very nature is an emotional business. Few investors have the self-knowledge, emotional stamina or self-control to make rational, intelligent and profitable decisions, particularly in times of stress. So often, investors react wildly to bad news, frequently selling shares of perfectly good stocks–reacting with their emotional money minds rather than their rational ones.

Why is it that some investors may tend to make rational decisions, stick with their choices and strategies while others seem to act out their emotions and make investment decisions that may not lead to profit?

The field of behavioral finance has given insight into some mental miscues investors make that might sabotage and crimp their returns:

Fear of losing money – Psychologically, people give greater weight to a past loss than they do to a future gain. In fact, some individuals find losing money so distasteful that they talk themselves out of investing altogether. Some investors don’t make reasonable trade-offs because the drive to avoid loss sabotages any future gains or opportunities.

Possible Solution: Determine ahead of time exactly how much your clients can “emotionally” afford to lose as well as “financially”. They are often very different.

Worrying about the wrong risks – Investors are held captive by events that could be conceived as unpredictable or frightening events. People are traumatized by dramatic events. They can’t tolerate the anxiety that accompanies them. Investors often become blind and deaf to others’ advice in these times and tune out advice from others, including their financial professionals. They exaggerate current crises. What’s worse is that they forget the wisdom of lessons from the past. They overlook the fact that people who stayed fully invested during previous crashes recouped their losses.

Possible solution: Help investors base their decisions on what they can control, not on those factors they can’t control. Review the rationale for their current strategy and ask them if they feel it still makes sense based on everything you and they know at the time. If it does, review why the strategy still makes sense from time to time so you can help regulate any impulsive and emotional reactions that may bring them off course.

As you evaluate your investment strategies and investors’ individual situations, consider these points:

– Investors are more prone to make or lose money as a function of their emotions and attitudes than on the basis of their stock selection or trading system.

– The best system can be rendered a losing proposition by inappropriate implementation due to emotional and behavioral limitations.

– Appropriate or successful investor behavior can be learned to a large extent. Education is essential to helping investors stay in control and continue to grow, particularly in learning self-regulation and self-control.

Acknowledging and understanding your clients’ emotions is an important step in helping them stay on track with their long-term financial plans when challenging economies become the everyday reality. Likewise, helping them learn how to control their emotions even when the market turns upwards is equally important. Finally, encourage them to call at any time if they find themselves questioning their decisions and that you are always there to help when they have to make the tough decisions.

Managing Investor Fears in These Challenging Times

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Today more than ever, consumers need and want trusted advisors to help them cope with their fears and anxieties. They’re looking for a way to assure the safety of their assets and a way to assure their sense of financial well-being in a challenging financial environment. While assets are tangible and easy to measure, it’s more difficult for advisors to develop a gauge of how to deliver and measure their skills in delivering a sense of well-being.

Here are some tips that have worked for advisors based on feedback from clients:

– Set an example of stability and confidence. If your clients sense that you are clear about your priorities and in control of your actions, they will identify with your courage and strength. Your example will help to show leadership during these challenging times.
– Show caring and support for your clients. Inquire about their well being and that of their families. The clients who need you most may not have the time or the motivation to make the call.
– Help your clients to develop a sense of perspective. Economic conditions have always fluctuated at previous times of national and international challenges and crises, but the underlying strength of the American financial system has always shone through in the long run. Any hardships caused by recent events will not last forever.
– Remind your clients to take some time to relax. Emotional stress can cause fatigue, anxiety, insomnia, body aches, and other physical symptoms that hinder the healing process. Exercise, hobbies, and recreation can ease the mind and help your clients to deal more effectively with their situation.
– Remind your clients that not making dramatic financial changes during times of uncertainty and anxiety can be a sign of patience and prudence, not cowardice.
– Acknowledge your clients’ concerns and fears, while cautioning against impulsive and ill-considered actions. While we are all angry and disappointed, and we all feel uncertain about the future, we can cope best by focusing on what we can do to help ourselves and our families.
– Take this opportunity to review each client’s financial situation, to advise him or her regarding any changes that might need to be made. Taking small constructive actions at this time can help your clients to feel in greater control of their lives.