Most Popular Articlesfor Client Relationships
July 14, 2009
Behavioral finance can deepen your client relationships during market turmoil, if you recognize your clients’ emotional right-brained reactions before you offer insights based on your analytical left-brained analysis. By applying a three-pronged process of Recognize-Reflect-Respond, you can adapt to new information in a thoughtful and effective framework.
Gayle H. Buff, president of Buff Capital Management, proposed this model in "Behavioral Finance: So What?" her June 15 presentation 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. As a member of the CFA Institute’s Speaker Retainer Program, she has spoken about behavioral finance to CFA societies around the world.
Buff explained the elements of her Recognize-Reflect-Respond approach and said the best advisors develop instincts to integrate seamlessly the three Rs as they interact with their clients. It’s like driving a car with a standard shift. “You have to touch the gas at the same time as you’re letting up on the clutch. Someone can’t tell you the right amount of gas or the right amount of clutch. It’s a matter of practice, getting the right balance,” said Buff.
Part one: Recognize how brains– both yours and your clients’– work
Nobody consistently acts with complete rationality or a perfect balance between their left and right brains. Relationships between financial advisors and their clients have similar limitations. Conflicts between emotions and rational thinking can lead to bad investment decisions, when we react only with our emotional right brain and do not incorporate input from our rational, reflective left brain. On the other hand, ignoring client emotions may damage the advisor-client relationship, resulting in clients’ losing trust in the advisor and failing to implement their plans.
Buff described how left and right brains differ through an analysis of our ability to multi-task:
“Why Can’t I Multi-Task?”
Left Brain |
Right Brain |
Task-oriented |
Distracted |
Goal-directed |
Loss of focus |
Detail-oriented |
Big picture |
Limited perspective |
Richness of experience |
To make the best decisions, we need to use both sides of our brains, said Buff. She demonstrated this using a classic experiment, by asking her audience to count how many times the white team passed the ball in a video clip. (You can view a similar video clip on YouTube). Left-brain-dominant members of the audience focused on counting the passes. As a result, they– including this reporter– totally missed the gorilla that passed through the group.
Viewers who saw the gorilla used their right brain more effectively, because it employs parallel processing rather than serial processing. “Parallel processing is the ability of the brain to process simultaneously incoming stimuli…. and allow for quick and decisive action,” said Buff.
On the other hand, excessively right-brained individuals are so distracted by the gorilla in the experiment that they lose count. “Don’t let the gorilla distract you,” Buff said. “It’s enough to ‘register’ that it is there and then to return to the original task.”
Advisors should recognize how they process the financial world’s “gorillas” – the disruptive challenges that require processing by both sides of our brains, said Buff. If that’s difficult for advisors, it’s even more challenging for clients whose portfolios are threatened by metaphorical gorillas, such as short-term market volatility.
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