From Raymond James Practice Intelligence newsletter

Do you consider yourself an expert on your clients’ behavior? Before you pick up the phone to contact your clients, are you confident of the reaction they will have to your suggestions? How often do you think about your clients’ typical response style to financial decision-making? If their behavior veers from the norm, would you recognize something was not quite right and be able to respond to them with appropriate, but probing questions to learn more about their reactions?

Identifying your clients’ financial decision-making and investment style is important in communicating with them effectively. Research in the relatively new field of behavioral finance confirms the influence of emotional reactions on financial decision-making. Knowing whether people are more cognitively or emotionally influenced in their decision-making style and understanding their financial history can help you create an effective approach for having client discussions.

In this article we will look at different clients’ investor styles and strategies for having client conversations with these different financial profile types. By exploring your clients’ money beliefs and allowing these concepts to shape your conversations, you will be able to enhance your ability as an advisor to guide clients toward sound choices and make financial decisions consistent with their goals.

Emotional vs. Cognitive Investors

Regardless of the content of a decision, there are some critical response styles that impact how we decide. When evaluating your clients’ decision-making process, the first concept to consider is whether they are more emotionally or cognitively influenced. Do they generally make decisions based on their “gut reactions” or are their decisions empirically based? Both styles can potentially present difficulty unless you understand strategies for interacting effectively. 

Emotional investors can be challenging because they may not initially respond to rational explanations of your recommendations. However, once they feel comfortable discussing emotional issues with their advisors, they will take action. When they do feel confident to take financial action, they may want to alter their portfolios frequently as market conditions change and be unduly influenced by high-risk investments that their friends or associates recommend. Additionally, they may be difficult to manage if they have experienced losses, and as a result might be resistant to basic investment principles such as diversification and asset allocation. Nevertheless, emotional investors can become your best clients, because they value professionalism, expertise and objectivity. In dealing with them effectively, the best approach is to take control of the situation by demonstrating the impact that financial decisions have on family members, lifestyle and the family legacy.

Cognitive investors can potentially create a challenge because they often follow friends, colleagues or advisors about investment decisions. They want to be in the latest, most popular investments, without regard to a long-term plan or the risk of entering an investment that is peaking. They can be overly influenced by the “talking heads” on financial news shows. Advisors must recognize that this type of client tends to overestimate their risk tolerance. They don’t like the ambiguous situations that may accompany the decision to enter an asset class when it is out of favor, and they tend to say yes too quickly and then regret their decisions.

In working with cognitive decision-makers it is important to collaborate with them, instead of directing them. Advisors should back their recommendations with data. Since their biases are cognitive, a steady educational approach on the benefits of portfolio diversification and sticking to a long-term plan are effective and will generate client loyalty and adherence to investment plans. Cognitive investors are usually grounded enough to listen to sound advice when it is presented in a way that respects their independent views.

Five Financial Behavioral Styles

After acknowledging your clients' general approach to decision-making, the next step is to explore their individual histories and learn about their financial approaches to money. In my work with advisors, I have found that one of the following five behavioral styles usually reflect a client’s approach to their monetary decision-making:  financial initiator, financial analyzer, financial collaborator, financial avoider and financial dreamer. There are four primary behavioral characteristics that differentiate these client types from one another: independence, knowledge, confidence and initiator vs. avoider.

When you understand the factors that drive a client’s financial decision-making process, it enables you to formulate a plan that addresses his or her particular values and needs. Take a moment and think about one or two of your key clients. Consider which profile best describes your client and how individual history, values and concerns might influence his or her financial decisions.

Financial Initiator

Financial initiators are self-assured, empowered and optimistic in most of their endeavors. They ask sophisticated questions, but chances are they have pre-researched some of the answers. They are extremely knowledgeable and thrive on the power to understand financial solutions and make financial decisions. They will want to make an informed choice about the financial professional they engage, based on credentials and depth of experience. As an advisor, it is important that you are confident, explaining in detail the basis of your financial recommendations, and comfortable collaborating with them on final decisions.

Financial Analyzer

Financial analyzers have a good understanding of household finances and take initiative in thoroughly researching investment opportunities and tracking results. They have good, basic questions and are financially knowledgeable enough to understand possible solutions and implement decisions. They are comfortable with the power of making financial decisions and are analytical and disciplined in their approach. When working with them as a financial professional, it is important to set clear goals and acknowledge their desire to be an active part of the process. They need to feel both independent and “in control” in order to feel comfortable working with you as an advisor.

Financial Collaborator

Financial collaborators are extremely balanced in their lives and provide their families with financial comfort and stability. They are cooperative and trusting in their relationships. They ask intelligent questions and are capable of understanding solutions. However, they prefer not to be the primary decision-maker. If they are married or in a relationship, they will promote their partners, and are comfortable creating the illusion that they are “taken care of.” As their financial advisor, don’t make the mistake of underestimating their financial intelligence or independence. Be sure to indicate your respect for their financial role by speaking with them often and including their input in all important financial decisions. 

Financial Avoider

Financial avoiders are concerned about their current finances and financial future. They will ask enough financial questions to create overwhelming anxiety for themselves, but don’t feel confident or knowledgeable enough to explore issues in depth in order to create solutions or make informed decisions. In addition to their excessive worrying, they are easily intimidated and often overwhelmed. They can be unrealistic in their expectations and as a result can be “blamers,” viewing themselves as victims when things don’t go as they would like. As an advisor, you need to educate them in a nonthreatening way and guide them through financial decisions.

Financial Dreamer

Financial dreamers have never expressed the confidence or desire to take control of their financial world.  In fact, they “expect” to be taken care of by those around them and are resistant to being independent. They are in denial about financial realities and think everything will be fine because “it just has to be.” Their refusal to address financial issues in a responsible manner results in an immature approach to money and investing. They avoid unpleasantness at all costs, and are unlikely to ask questions or seek the services of a financial advisor. Should you become the financial advisor of a financial dreamer, you must be willing to invest time to develop a trusting, mentor relationship for the outcome to be successful.

Advisor-Client Best Fit

According to the October/November 2009 edition of Morningstar Advisor, in order to become an effective financial mentor, advisors need to conduct a thorough interview with clients. The goal of this interview is to identify their traits, determine risk tolerance, identify behavioral investor type and biases, and tailor advice to a client’s behavioral type.

However, as important as identifying the behavioral and investment style of a client is, being clear about what client type is a best fit for you and your practice is just as crucial. Do you enjoy “nurturing” your clients? If so, you may do well meeting the needs of financial dreamers. Or perhaps you work better with informed, independent individuals who want to be a partner in their money decisions. If so, you may work better with financial collaborators or financial analyzers. Those professionals that embrace this approach of identifying their own “best fit” clients and are willing to become “experts” in their clients’ behavior will clearly have another tool for maintaining their competitive advantage.

Denise Federer, Ph.D., is a clinical psychologist, executive coach and founder of Federer Performance Management Group. She has been a consultant to the financial industry for 25 years. For more information you may contact Federer at 813.876.7191 or visit her website FPMG.INFO