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Psychographic due diligence: What you really need to know about your client

by Aug 23, 2023Industry insights

Psychographic due diligence: What you really need to know about your client

by Aug 23, 2023Industry insights

To enhance client relationships, invite referrals, and maximize retention, advisors need to dig deeper than simply examining a client’s financials. They have to get inside their clients’ heads.

Study after study on why clients leave their advisors show communication to be at the heart of the problem. That doesn’t mean clients want more emails from their advisor. It means they aren’t feeling like they are on the same page.

A recent Morningstar study confirmed the issue once more. Summing up the major reasons why clients leave their advisors, Morningstar’s behavioral scientist, Dr. Danielle Labotka, told Financial Advisor Magazine that the top reasons essentially represent “the product of the advisor not taking the time to truly understand what the client wants from the relationship, what they’re looking for.”

On the surface, this should be a relatively easy problem to solve. Nonetheless, it proves elusive to many advisors, who pay for it later with unexpected defections. Addressing the issue can be a simple two-pronged approach that integrates “psychographic due diligence” into the client orientation process and uses that due diligence to drive ongoing interactions with the client.

What are psychographics and why are they important?

Psychographics are psychological or behavioral traits and characteristics. The term is used to differentiate market segments based on internal characteristics as opposed to external characteristics such as age, income, gender, or race.

Psychographics were introduced to the investment industry in the late 1970s when a landmark New York Stock Exchange (NYSE) study examined the psychological traits of investors for the first time to assist its member firms in marketing themselves and their services to the public. The results of the study, published in 1979 under the title “Public Attitudes Toward Investing,” created a watershed moment for the industry by introducing new ways to segment the investor audience.

Prior to the public attitude study, the industry relied on demographic characteristics such as age, income, and location to segment its audience. In that world, your value to an investment firm was largely determined by your ZIP code. Taking cues from other industries, the NYSE study took a giant step forward, inquiring about psychological factors such as investment knowledge, risk perceptions, personal investment orientation, level of trust, and a host of attitudinal variables about investment firms and services.

A comprehensive analysis of the results concluded that psychographic traits were not only important but made better predictors of investor behavior than the demographically defined market segments the industry had previously been using, echoing the conclusions of other industries as well. The NYSE’s analysis identified nine separate market segments based on psychographics, assigning them labels such as “optimistic novices,” “cautious achievers,” or “financial dreamers.” People in all of these segments had the means to invest, but their psychographic profiles, rather than their income and net worth, proved a far better indicator of the products and services they preferred, as well as the firms they dealt with.

Armed with these new insights, and other research on the investor’s mindset and behavior, the financial industry launched into an unprecedented decade of new products and services and tailored marketing messages. During this period, fee-based financial-planning services, fee-based advisory services, money-market checking accounts, and other new offerings began to gain more widespread marketplace acceptance and adoption.

The common thread among these offerings was a far better understanding of what customers wanted, perceived, and expected. It didn’t take magic to convert that into new services and more effective marketing—the industry had simply never asked the right questions before.

The lesson for advisors today is similar. It’s naive to conclude that all of your clients want, expect, and perceive the same thing from you or have the same orientation toward money and investing. To please them, you need to understand their psychographics, and to do that you need to ask. If you don’t, your approach to some clients may not fit their comfort zone, and you will generally not be aware of that until you receive notice that they are transferring their assets elsewhere.

Ask and ye shall receive

New clients already get peppered with questions from their advisors to assess their financial picture. Advisors may feel that since they ask about subjects such as the client’s financial goals and risk tolerance, they are already delving into the client’s psychographics. Unfortunately, this only begins to scratch the surface. What’s more, common categories of goals and risk tolerance are overgeneralized, producing responses that can be of little use, or even misleading. Above all, they fail to get at the personal perceptions, feelings, biases, and expectations a client harbors—the things that can come back to haunt the relationship later if not adequately communicated up front.

A number of reasons can serve as a deterrent to asking the right questions of a client:

  • Lack of confidence in knowing what to ask.
  • Feeling that you might be imposing on the client.
  • Fear of being too personal.
  • Lack of expertise in assessing personality traits.
  • A false sense of confidence that you already have this information from initial meetings and your onboarding process.

These can be eliminated by a little training, planning, and experience in conducting a client interview. You don’t need to be a Ph.D. in psychology to perform such a task. You just need to prepare a list of questions and topics, keep notes on them as prompts during the conversation, and practice it a few times to make it conversational instead of what might be perceived as a cross-examination.

The good news is that when a prospect comes to you from another firm where their needs were not being adequately met, you not only have a perfect entrée for finding out what those needs are, you can earn relationship points simply by talking about them with the prospect.

Much of the conversation can be directed toward topics rather than specific questions. That way, you can open a topic and just let the client talk to you without feeling like they’re being grilled. The more the client reveals, the more comfortable they will be about revealing additional information, and the process feeds on itself. You might be able to find out what you really need to know without having to ask too many specific questions of the client at all.

Take the subject of why a prospect may have left their former advisor. Asking “Why did you leave XYZ firm?” is dry and pointed. A prospect might just give you a canned answer rather than bad mouth another firm or advisor. Instead, try something like “Tell me about your prior experience with investment managers. I’d like to make sure that if you come with us, we’ll be better able to meet your needs.”

Here are some ideas about the type of information you should try to obtain:

  • Understand the client’s immediate needs, but also examine the bigger picture. What are the biggest personal drivers that affect the client’s financial decisions? Are both spouses in alignment on that?
  • What are the client’s true financial objectives? “Long-term growth” doesn’t cut it. Have the client define what they need or will be happy with for growth. Then meld that with the discussion of risk. Have them quantify it—how would they feel if they lost X% in a given year? How would they feel about losing X% in specific buckets, such as their retirement accounts or children’s college accounts?
  • What are their knowledge, experience, and perceptions of different asset classes? Clients may not be totally honest in revealing their weaknesses, so it is often better to ask where they would like to learn more.
  • What is their quantifiable risk tolerance with different buckets of assets? Here, too, conservative versus aggressive doesn’t cut it. Dig deeper. Put numbers on it.
  • What is their feeling about liquidity and the trade-off between liquidity and return?
  • What factors from their culture, experience, or upbringing inform their investment orientation? How about their spouse?
  • How much trust does your client have in the markets, government, corporations, or the economy?
  • What is the relative importance of different goals like retirement, college expenses, lifetime income, legacy, etc.?
  • What financial scenario would cause them to feel the greatest amount of pain or regret? Losing money, or missing out on a big opportunity?
  • How important to them is the social or societal impact of their investments?
  • Do they (or their spouse) have serious health issues or concerns for the future?
  • What are the most important things they would like to happen after they are gone?

And perhaps most important of all:

  • What are they most looking for in you and your firm as their financial advisor?

Using psychographics in your practice

Integrating “psychographics” is about getting to know your clients better and then using that information to tailor product and service solutions that target their needs. Practically speaking, that doesn’t mean 100–200 individual solutions. Categorizing your clients into groups with similar profiles should enable you to define perhaps three to five distinct subgroups. One of your groups might even be “clients at risk” if you want to set them apart.

You start the segmentation process by collecting information through direct inquiry—conversational meetings you hold with clients specifically to learn more about them.

You may think that your knowledge of behavioral finance represents all you need to know about human financial behavior. Assessing an individual’s psychographics, however, is different. You will no doubt uncover important biases in your client, like loss aversion, home bias, or endowment effect. But while behavioral finance tells us about how human brains work in general, it doesn’t give us a profile of any single individual and what their priorities and expectations are for investment advice.

Nothing in behavioral finance, for example, will tell you that a client has family health issues or that their parents lived through the depression and taught them not to trust banks. Such insights cannot easily be programmed into a questionnaire and analyzed with charts and graphs the way other aspects of financial planning can. Moreover, there isn’t an established body of financial psychologists like there are tax experts or estate attorneys to whom you can outsource your clients’ personality issues.

The good news is that advisors don’t need to become part-time psychologists to begin implementing practices that can dramatically improve client relationships, generating material benefits in client satisfaction, retention, and referrals. Here are a few ideas on how to gather and incorporate psychographics into your practice:

  • Hold a completely separate meeting with each client to chat with them about money and investing. Your initial prospect meeting will likely be too focused on personal chemistry and your firm’s capabilities to gather the information you want, and a financial-planning session will follow a prescribed methodology of gathering financial information rather than encouraging open conversation.
  • Have a topic list prepared ahead of time to guide the conversation through relevant subject areas and to ensure that you collect similar information from each client.
  • Take notes at the meeting with the intention of developing a profile along similar lines for your other clients and identifying any specific feelings or perceptions that could conflict with your approach to managing their assets.
  • Use the notes to create different client groups, based on similar psychographic profiles.
  • Review key subjects at least once a year in conjunction with the client’s annual review, or as a separate meeting, perhaps over lunch or coffee for a more informal environment.

This is a relatively simple blueprint and you can certainly go further. I spoke with Joey Khoury, a senior wealth advisor and behavioral finance expert at Mission Wealth, a national RIA with $6 billion in AUM. Under Khoury’s direction, Mission Wealth is institutionalizing the task of knowing its clients better and specifically working with many of them on other parts of their lives that transcend the standard aspects of wealth management.

To accomplish this, the firm guides its advisors in holding regular in-depth meetings with clients, outside of normal progress meetings. Among other things, these meetings are designed to explore client issues in areas such as health, family, hobbies, social life, spiritual pursuits, and long-term life plans. In turn, advisors are encouraged to provide info on their personal lives as well, offering opportunities to foster bonds between clients and advisors on lifestyle interests rather than strictly on financial issues.

Related Article: Are advisors missing the point about behavioral finance?

The firm also offers an optional program to interested clients called Inspired Living, which seeks to understand a client’s life values and aspirations along 11 different dimensions and to better align them with the client’s financial goals. This process, which can incorporate expertise beyond that of the wealth advisor, involves working with clients to help them articulate their future aspirations. The program, customized for each client, may include exclusive events, exposure to outside thought leaders, specialized research, and the development of action plans designed to foster opportunities that relate to their individual life direction.

The aim of providing more holistic life services as part of managing wealth goes way beyond financial planning and starts with open, honest inquiry between advisors and clients. In the same way that companies and industries segment their customer base to more effectively serve them, financial advisors can segment their client base across psychographic dimensions. Then you will have what you need to hopefully make every one of them a permanent and prosperous long-term client.

The opinions expressed in this article are those of the author and the sources cited and do not necessarily represent the views of Proactive Advisor Magazine. This material is presented for educational purposes only.

Inspired Life is a trademark of Mission Wealth Management.

Richard Lehman is the founder/CEO of Alt Investing 2.0 and an adjunct finance professor at both UC Berkeley Extension and UCLA Extension. He specializes in behavioral finance and alternative investments, and has authored three books. He has more than 30 years of experience in financial services, working for major Wall Street firms, banks, and financial-data companies.