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In my previous article for Advisor Perspectives, I discussed the importance understanding which drivers of behavior are piloting an advisor’s clients. Through this psychological lens, advisors are better able to understand and empathize with their clients and anticipate the life changes and decisions they may face in the future.
Building on this, advisors also need to take a look inward to better acknowledge and identify the impact of the same drivers of influence on their own judgment and choices.
Why is this important?
Financial professionals are schooled in finance and believe that they follow a systematic, logical approach to their work. The nature of their work demands that people, coworkers and clients alike, place a lot of trust in them. A full roster of clients and excellent references are things that clients look for when choosing a financial advisor whom they will trust. However, there is one factor that ultimately determines how valuable a financial advisor will be and how long they will retain their clients’ business and trust: judgment.
When dealing with a financial advisor, the common expectation is for the advisor to operate from a place of logic and rationality. However, financial advisors are human, and the chances of them getting unduly influenced by the same factors as everyone else, whether obvious or latent, is very high. This is why the quality of their judgment plays such an integral role in them being able to do their jobs and earn trust. A state of unawareness about what’s going on behind the scenes can hijack the way an advisor operates.
Many financial advisors are well versed in the study of behavioral finance as it relates to client relations. Widespread articles advise investors to ignore the markets, to place their trust in their long-term plans and to not panic at the first signs of volatility. However, when clients make an investment, they aren’t the only ones invested in the situation.
Advisors, too, have a stake in the success of their clients’ portfolios – because in addition to time and energy, they are also investing hope of success and a growing firm. Their attachment to growing their firm and increasing their revenues can present a competing, conflicting demand as factors outside their control grow in perceived importance.
To inspire confidence, both in themselves and in the eyes of their clients, financial advisors should engage in introspection in order to take control of the things they can and determine which driver of influence is behind their actions.
Fear – Pain avoidance
The most important area that can help a firm grow is prospecting for new business. Ironically, this is also the area that is affected most by fear for two reasons: uncertainty and rejection. The best way for advisors to push past their anxiety about what is waiting for them on the other side of a prospecting call is by becoming aware of these two common human fears and thereby reducing their paralyzing grip. Bosses who do not realize that fear, not laziness, could be the root cause of poor prospecting can instill more fear and create a vicious cycle of poor performance.
Nobody wants to lose clients either. In the advisory business, especially for advisors who are committed to growth, it can be a scary prospect to face. Financial advisors, especially those who are fee-based, have an explicit stake in the success of their clients’ profiles. However, what happens in the face of lackluster growth or flat revenues? Fear sets in.
Advisors who are driven by fear and become desperate for revenues may experience significant changes in behavior that affect their client relationships and business. Such behavior might include overpromising to prospective clients, portfolio churning and/or becoming overeager in marketing efforts.
Fear always plays a role in business. However, it is how that fear is approached and channeled that is important. Realizing one’s fears before they lead to behavioral changes is a key aspect that is often overlooked and can lead down a problematic path if left unaddressed.
Greed – Pleasure seeking
Financial advising is a numbers game based on gaining clients and growing firms. It isn’t the gaining itself that is the problem because that is a natural part of any professional endeavor. The problem lies in being unaware that this is one’s main motivation and in allowing it to lead to destructive behaviors without realizing why. Chasing revenues becomes a natural extension and advisors may accept any client regardless of their fit with the organization.
The drive for growing revenues or a higher commission can manifest itself in situations such as suggesting high-commission products to clients who will not really reap a benefit from them. It can be simple for a financial advisor to rationalize this as a good move. While we may think we have a rational frame of mind, what we have instead more often than not is a rationalizing mind – that is, when not enough examination is devoted to our motivations, it’s easy enough to convince ourselves that anything we want to do as justified.
Ego – Protecting status
Part of selling oneself as an advisor and instilling confidence in prospects and clients means harnessing a certain degree of hubris. Everyone wants to feel like they’ve done a good job at work and that they are receiving recognition for their accomplishments. However, following the same theme as above, when behavior changes, trouble occurs. Perhaps an advisor has just received a write-up in a local paper or has been named to a ranked list upon which they want to maintain their status or even improve it. These measures of recognition feel great and can bring in valuable business.
An advisor may begin to change their behavior in ways that will affect their ranking or celebrity status. The metrics that determine this superficial status may begin to receive more attention than the real, day-to-day interactions that impact and define client relationships. In trying to increase their value, financial advisors trying to protect their ego and status may end up instead stripping their practice of the value they were initially recognized for.
Clients seek out financial advisors for any number of reasons, but in order to get them to stay long term, advisors need only work on one thing: the quality of their judgment. If they truly understand where their own behavior is stemming from, as well as the fears and motivations of their clients, it will get easier every day to stay “in the zone” and make mindful, self-aware decisions that are going to build trust and retain clients’ faith through market drops and life changes.
To understand the human side of investing, advisors need to keep in mind that they are human, too – and that’s a piece of advice you can take to the bank.
Krishna Pendyala is the founder and chief empowerment officer at the ChoiceLadder Institute, a social enterprise with a ‘pay it forward’ mission to enhance the skills of human judgment and choice-making. Our reflective workshops are informed by research from the fields of systems thinking, neuroscience, behavioral economics and social psychology. We focus on day-to-day choices that take less than five minutes and highlight the impact of unconscious bias, social conditioning and conventional beliefs on our judgment. Learn more about ChoiceLadder at www.choiceladder.com. Follow ChoiceLadder on Twitter.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
