Shlomo Benartzi, writing in Financial Planning, has some interesting ideas about managing client impulses. He’s also the chief behavioral economist for Allianz and a professor at UCLA. Here’s the gist of his argument:
The first step in the process is to help your clients understand the psychology of trading that can lead to poor decisions. Help them understand that these misguided impulses of the intuitive mind are quite natural, but that there is another, better path to follow, one that is guided by the reflective mind.
The second step is to agree on an investment strategy, which would include an acceptable balance between risky and conservative instruments. As financial advisors, you are already very familiar with this process.
What would be novel for most advisors, however, is to commit to a specific contingency plan. This is an agreement made in advance about what action will be taken should a certain event or condition occur -for example, if the market goes up 25% or down 25%.
The third component of the Ulysses Strategy is to formalize these agreements in a commitment memorandum, to which both the client and the financial advisor are parties. Although research shows that financial professionals are typically less affected by the impulses of the intuitive mind, they are not immune to them completely. And by being co-signatories to the memorandum, financial advisors put themselves on the same footing as their clients.
He calls it the Ulysses Strategy in honor of Ulysses being tied to the mast of his ship, in order to hear the Sirens’ song without steering the ship onto the rocks. The basic idea is just to agree to a plan of action in advance. Plans that are rational and thought out under calm conditions are probably more likely to work than impulse decisions made under market duress.
No doubt many advisors are already using indicators or market conditions to help make account management decisions-it’s the client involvement that is more novel and that Benartzi sees as beneficial. I think it would be difficult to figure out the right mix of contingencies to put into a commitment memorandum, but the process may have merit.
Posted by Mike Moody 
