Monday, June 22, 2009

Behavioral finance can deepen your client relationships

Understanding behavioral finance can improve your client relationships. That's the lesson I took away from "Behavioral Finance: So What?", a June 15 presentation by Gayle H. Buff, president of Buff Capital Management, to the Boston Security Analysts Society (BSAS). Buff has 20 years of experience working with  individual investors and is a past president of the BSAS.

Like financial advisors, clients of investment and wealth managers don't act with complete rationality. They react with their emotional right brain in addition to their rational, reflective left brain. However, Buff said, to optimize our ability to make informed decisions, we need to use both sides of our brains. Advisors who understand this, can tailor their interactions with clients to take advantage of this. 

Behavioral finance experts have identified loss aversion, uncertainty aversion, and overconfidence as a few of the key investor tendencies that reflect the influence of the right brain. During the past year's financial crisis, Buff observed many instances where fear of uncertainty trumped fear of loss. Some of her clients wanted to sell their investments, even if that potentially meant locking in losses.

Behavioral finance helped Buff respond effectively to her clients who wanted to sell. Understanding that clients' "sell" requests were intensely emotional, "I don't take it personally or as them telling me I've done something bad," she said. Instead of arguing with them, Buff listened to her clients' fears. "Talking about what makes us afraid makes us less fearful," she said.

It isn't easy for most advisors to follow Buff's strategy. "We often want to rush in with facts," she said. However, advisors need first to acknowledge their clients' feelings. Only after doing that does it make sense to give clients an alternative perspective on the issues. The advisor who takes this two-step approach will find their clients more receptive.

In fact, if advisors and clients can work through a financial crisis, they may end up with a much deeper relationship. One of the big advantages may be enhancing clients' understanding of risk. Prior to the past year's financial crisis, most clients overestimated their risk tolerance said Buff.

Buff listed five areas that advisors should explore with their clients, including clients'
1. Capacity to tolerate market volatility and economic risk
2. Characteristic defensive posture in the face of anxiety and uncertainty;
3. Vulnerabilities, passions, strengths, weaknesses, and dreams
4. Ability to process, integrate, and adapt to new information a new experience
5. Commitment to working collaboratively and synergistically as one-half of the advisor–client
relationship


This blog post only touches on a tiny portion of Buff's material, which included a bibliography on complexity theory and adaptive systems, behavioral finance and investor psychology, and the intersection of theory and practice. However, she speaks on behavioral finance to CFA societies around the world, so she may come to your area.

By the way, it has been my pleasure to get to know Gayle through volunteering with her on the BSAS' Private Wealth Management committee. I've seen her dedication to financial education.



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Susan B. Weiner, CFA
Check out my website at www.InvestmentWriting.com or sign up for my free monthly e-newsletter.
Copyright 2009 by Susan B. Weiner All rights reserved

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