Advisors are beginning to realize the importance of behavioral concepts in managing client relationships and setting expectations. A list of standard answers to the most common behavioral biases doesn’t exist, but there are plenty of good books that address the subject in language we can all understand. And there are formal certifications in behavioral finance available to advisors, as well as courses at various universities. An exposure to the most common biases can go a long way toward providing an advisor with a sense of confidence in dealing with them rather than getting caught off guard and potentially making the problem worse with a response that aggravates an issue rather than moving toward solving it.
Educating clients is not a bad idea either. It could be productive to substitute a good book on behavioral finance for that end-of-year bottle of wine or restaurant gift card. In addition, firms are now taking on behavioral coaches, both for themselves and their clients. The coach can be brought in only when needed or when the client elects to meet with them after being given the option. Not every client will feel the need, but for those that do, the intermediary could potentially have a huge impact on helping to save an advisor-client relationship that is having a rough period. Coaches and other third-parties versed in behavioral finance are also excellent choices for speakers at client events.
Managing the ongoing performance-evaluation process would be the next thing to focus on. To avoid the problems of availability bias, selective memory, and other behavioral issues, advisors might do well to create their own goal-centric evaluation mechanism. This might entail a list of goals, preferences, wish-list items, and so on, that is created when the client establishes their initial plan. Estimated time frames and any relevant milestones that can be identified up front toward the eventual fulfillment of those goals can also be included. Notes on each goal or milestone can be as elaborate as the client is willing to specify, and if the client has difficulty doing that, the advisor should prompt them as much as possible. Some advisors have created supporting visuals to direct their clients’ thinking process.
Other advisors, working with wealth-management firms and investment managers, have also taken the next big step toward more of a hybrid version of goals-based portfolio measurement. Here, performance evaluation is not only tied into life goals but also a personalized return benchmark identified in the financial-planning process as one that should adequately help the client meet their retirement-income and growth goals. This is very different from a market benchmark and relies on firmly educating the client on taking a longer-term perspective that might stretch out across a 30- or 40-year retirement period. The long-term trend of the personalized benchmark is what counts, not performance in any given month, quarter, or year. Many advisors combine this approach with more of an emphasis on risk-managed active-investment strategies that can help reduce portfolio volatility, creating a “smoother ride” over a longer investing time frame.
No matter the methodology chosen, advisors need to recognize that moving to a goals-based wealth-management process is a major decision that can have many potential upsides for a practice—as well as the importance of understanding the pitfalls identified here. Various methodologies should be evaluated, and peer feedback from advisors who have successfully instituted the process is invaluable. The rollout to clients needs to be handled carefully in an educational sense once the advisor has developed a goals-evaluation process that he or she believes is a good fit for their practice and clients. As the advisor gains further insights on goal-setting techniques in general, and on individual client needs specifically, the process should be refined in ways that will serve them well in maintaining successful client relationships.