The more painful the situation, the more motivated we are to act. Here, we share an example of how an advisor can build a relationship with a client to become a trusted advisor and how that trust helps inspire referrals.
I recently renovated my kitchen. I planned to install new floors, dismantle old cabinetry, and have a professional install new cabinets and a new sink. My timeline was tight because the installer was fitting me in between other jobs.
The floor took longer than I had planned, and when I pulled the old cabinets off the wall, I discovered a big problem: the plumbing needed to be repositioned, and that task was way beyond my technical skills. Even worse, it needed to be done immediately or I’d lose my installer.
My usual plumber wasn’t available for two weeks! I managed to find an emergency plumber, who arrived at my house 90 minutes later and finished the work two hours before my installer arrived. The emergency plumber charged more than twice what my usual plumber would have billed—but given the magnitude of the problem, I was happy to pay the difference.
What Does a Plumbing Emergency Have to Do with Being a Financial Advisor?
My plumbing crisis provides helpful insights into human motivation. There is a progressive structure that organizes motivation. When a problem is simple, I prefer to fix it myself and save money. When the problem is complicated, I have a professional I trust, and I accept that I have to pay a fee for an expert to solve my problem. When the problem is huge and the consequences are dire, I’ll pay whatever it takes to solve the dilemma. Motivation increases with the severity of the problem. After all, nobody asks for a discount when they need emergency surgery.
Renowned behavioral finance researcher Daniel Kahneman teaches us that human motivation is largely a function of managing pain. His studies showed that pain is about two and a half times more motivating than an equal amount of pleasure. Thus, my emergency plumber can charge significantly more because of the magnitude of my painful problem.
This same progressive structure applies to investors. When markets are benign and investing appears simple, many investors prefer to save the fee and do it themselves. As their financial life gets more complicated or markets get choppy, most investors find a trustworthy professional who can help. When the accumulation of wealth makes things really complicated, investors hire several advisors to try to ensure that nothing is missing that can hurt them or that they should be taking advantage of. Importantly, if these investors discover they are missing something that could increase or protect their wealth, they will discontinue working with the advisor who failed them.
Herein lies the opportunity. By showing prospects their actual situation, an advisor can begin building a relationship. Showing the consequences that arise from a complex financial life and highlighting what is missing from an existing plan trigger the pain point and motivate investors to engage your services.
But Wait; There’s More!
It’s easy to understand the direct positive correlation between wealth and complexity: as wealth increases, so does complexity. However, there is also a direct negative correlation between complexity and mental awareness. As things get complicated, the brain often becomes overwhelmed and simplifies the problem. Kahneman calls this narrow framing: the brain’s tendency to edit out information to make the problem more manageable.
This creates a classic double bind for investors with significant wealth. Precisely when they need professional advice, they are likely to oversimplify their awareness of their actual financial situation.
The thoughtful financial advisor recognizes this. Instead of engaging clients at their realized point of need (what they know they need), she shows clients their actual point of need (what they are missing). Pointing out the services and solutions that investors are missing makes your message not only valuable but also referable.
This same concept works when speaking with other professionals in your network. When you show how your services can help clients solve a potentially painful problem, other professionals are more likely to become a referral source that you can use to build your practice.
The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to change over time.
A message from Advisor Perspectives and VettaFi: Advisors who don’t grasp the implications of artificial intelligence (AI) risk being left behind. Join VettaFi for an AI Symposium on August 30th at 11 am ET and hear from thought leaders and experts about how AI will transform the way investing works. Register here!
© AllianceBernstein
Read more commentaries by AllianceBernstein
