Orion, Advisor Group And AssetMark Executives Discuss Client Retention Strategies During Inflationary Times That Leverage Behavioral Finance Techniques
In Lewis Carroll’s children’s classic “Through the Looking Glass,” the Red Queen informs Alice on the rules of running in her world: “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”
This widely used analogy fits perfectly with inflation. If inflation runs at 8%, your investments must earn 8% just to keep pace. Many investors, faced with the erosive effects of inflation, fear Alice’s conundrum and contemplate excessive, risk-laden moves to “catch up.”
These worried investors turn to their advisors, who must do more than advise on financial matters. They must take on the extra role of counselor to prevent the client making sudden moves out of frustration and fear, including leaving the advisor and trying to manage their own assets or finding another advisor that the client believes may hold the elusive solution.
Behavioral finance, which lies at the intersection of behavioral psychology and investment decisions, can provide answers during this time for advisors to calm and retain clients by addressing the psychological aspects of their experience so they can recognize and receive sound, quality financial advice.
Daniel Crosby, Chief Behavioral Officer at Orion, says that inflation can be especially insidious from a behavioral perspective because of “the ‘availability heuristic,’ which is the finding that the easier to recall a piece of information is, the more important it will be perceived to be.”
Crosby gives an example of shark attacks, which are perceived as more dangerous than diabetes because shark attack news is easier to recall than articles about diabetes, although in truth diabetes does far more damage than sharks.
“Recent consumer sentiment surveys have been among the most dire of all time, precisely because inflation is everywhere,” says Crosby. “You experience its impact every time you buy gas, milk or bananas, and because it’s so pervasive and easy to recall, the perceived negative impact is dramatic. As a result, advisors need to be prepared to have hard conversations with their clients about inflation since it touches each of our lives many times each day.”
Preparing For Hard Conversations
That hard client conversation about inflation can serve as a stabilizing event that retains and benefits the client – if the advisor manages it well.
Kirk Hulett, Executive Vice President of Business Coaching & Consulting at Advisor Group, who holds a BFA (Behavioral Financial Advisor) designation, says that his firm has “been ahead of the curve in aligning behavioral finance resources with advisors to help clients with the emotional complexities that come with going through uncertain economic and market cycles.”
Advisor Group offers a training program through which professionals can prepare to earn the BFA designation. The program “offers training and coaching in the fundamentals of behavioral finance and the application of its key tenets to the delivery of advice.”
According to Hulett, financial advisors who complete the program experience “a high rate of success in calming and retaining clients by flipping the script of how investments and planning are typically discussed, so that emotions versus goals versus practical needs of the moment are properly disentangled and approached in ways that help drive clarity – and with that, confidence – for the client.”
Addressing Emotions And Misperceptions
Hulett says that client emotional reactions must be addressed first, before proceeding to logical discussion. “When we are being reactive, the emotion centers of our brain are active, but our logic centers are not. Before clients can weigh objective data, they first must resolve the complex emotions they are feeling. This is what allows the logical brain to turn back on, so to speak.”
He cautions that financial advisors attempting to discuss economic data before addressing a client’s emotions “risk appearing aloof, or worse yet, dismissive of client concerns.”
Instead, the advisor should deploy behavioral finance discussion tactics “to listen more effectively to clients, and to target the guidance provided to them in ways that help them distinguish between fears, realities and next best steps.” Hulett says that listening and reassurance increase the client’s sense of loyalty.
Michael Kim, President and Chief Client Officer of AssetMark, emphasizes the importance of clearing up client misperceptions about inflation. “We believe that education and insights about the nuances of the economic environment help financial advisors make a difference with their clients, particularly during these uncertain times.”
Kim notes that clients may not understand how different components of the CPI can vary from headline inflation rates. “For example, housing costs, which make up a significant portion of CPI, are in fact cooling given the recent jump in mortgage rates. However, the war in Ukraine continues to drive unpredictability in energy and agriculture commodity prices.”
Clients may also lack understanding about inflation’s impact, such as the myth that inflation automatically causes recession. Kim states that “advisors can remind their clients that the fundamentals are actually quite strong: the economy created over 840,000 jobs in July and August, and unemployment levels are at record lows. This does not feel recessionary.”
Refining The Course…Or Holding Firm
Once a client is calm and clear of misunderstandings, the conversation can finally proceed to the crucial question – what should the advisor and client do to respond to inflation?
Kim says that there’s “no ‘one-size-fits-all’ approach to financial planning and portfolio construction process during these uncertain times.” He points out that some asset classes buffer against inflation, such as natural resources and commodities, but these assets are highly sensitive to inflation, so may inadvertently increase risk.
During uncertain times, Kim advises, “advisors should be meeting with clients to update their financial plans in ways that reflect the real impact of inflation, and to ensure things like retirement lifestyles have been updated to account for reduced spending power. Discretionary spending should be a key area of focus for advisors.”
According to Kim, “[t]he key is for advisors to engage proactively, bring insights on financial plans and portfolios, and most importantly, remind the clients why they hired the advisor!”
But what if your advice is to keep the portfolio as-is and stand firm? Crosby says that the client conversation must end with a recommended activity for the client to complete, because the client will feel the need to take action. “The advice to ‘do nothing’ is typically sound from an investment perspective but is enormously frustrating from a behavioral perspective.
“Clients want to see progress, and while tinkering with their portfolio might be counterproductive, an advisor can still suggest actions like reading an article or listening to a podcast that will give the client the satisfaction of movement without the damaging effects of overtrading.”
When To Start Using Behavioral Finance Tools?
Under Crosby’s leadership, Orion encourages advisors to work behavioral finance into a client relationship from the early stages. He explains that Orion is “actively developing assessments and other tools that give advisors deeper insights into client behavior as part of our mission to help our advisors be the best in the business at understanding and connecting with their clients.”
Crosby states that these tools “allow for deep discovery and bespoke planning on the part of the advisor and can serve as a catalyst for couples and families to have better, deeper conversations about how their financial preferences align.”
The Bottom Line On Retention
Hulett states that, “[a]t the end of the day, client retention is driven by the extent to which the client feels fully served – and cared for – by the financial advisor.”
He emphasizes leveraging behavioral finance techniques “to deliver a truly holistic experience to the client,” which will allow the advisor to “better understand each client’s hopes and dreams, as well as their fears and anxieties.”
According to Hulett, this ultimately leads to increased client retention: “Knowing your client at this level of detail can help make the advisor indispensable to the client’s broader financial life.”
Julius Buchanan, Managing Editor at Wealth Solutions Report, can be reached at firstname.lastname@example.org