From the Archives: Two Approaches to Motivating Clients

Ken Haman, a managing director at the Advisor Institute at AllianceBernstein responds to the following question posed by an advisor and published in Investment News:

Q: I’ve had some frustrating conversations with clients recently—trying to get them back in the market. Very few are taking my advice, even though they seem to know that staying on the sidelines is a mistake. What’s going on, and how can I get them “unstuck”?

A: Problems like this have to do with how people make decisions. Behavioral finance uses the term “inappropriate extrapolation”–and insights about it can help you understand your clients and respond to them more effectively.

To make any decision, human beings create a mental picture of the future. That’s what “expectations” are–the ability to take information from the past and present, and project it into the future. Unlike most animals, human beings can project far into the future; as a result, we are able to “plan ahead.” Unfortunately, we usually don’t create these future images terribly well. Instead of making a thoughtful assessment of what’s likely to happen in the future, we typically picture the future as just a continuation of the recent past.

Essentially, you want to learn how to install a positive picture of the future that the client feels is likely to happen in reality. Start by explaining the mechanisms of the market and illustrating visually how those mechanisms work. Many investors have only the vaguest understanding of the cause-effect dynamics in the markets. Instead of making thoughtful, well-informed decisions, they react to their perception of patterns and trends. Market “mechanisms” are those cause-effect relationships that equip financial professionals to invest rationally instead of speculating randomly.

By looking at how market mechanisms operated in both the recent and more distant past, you teach your clients how to think more strategically about the markets. This allows them to build a more vivid mental picture of market behaviors in the future. Make sure you explain market mechanisms visually as well as verbally: use charts and graphs that show market behaviors over time. Whenever possible, connect your investment recommendations to a clear explanation of the mechanism that is involved.

Second, provide an adequate level of detail about the mechanisms you explain. There’s a commonly held myth that clients aren’t interested in hearing about the markets. So, many financial advisors gloss over important information and rush to their proposal without creating a case the client understands. But clients are interested in understanding the mechanisms that drive their investment results–as long as your explanation is clearly illustrated and easy to understand.

Finally, you have to deliver your message with personal conviction–that you fully believe the future will look the way you anticipate. Your clients need to borrow your conviction and clarity about the future. That’s how they’ll build their sense of confidence in the decisions you’re asking them to make. Take a stand on what you believe about the future, and add the courage of your own convictions to the clarity of your explanation.

There is also an alternative approach of just being frank with the client and telling them that you don’t know exactly what the future holds, nor does anyone else.  However, you adhere to a systematic relative strength process that gives you great flexibility to allocate to a wide range of asset classes depending on how the future unfolds.  At times, the approach can be allocated very conservatively and at times it can be allocated quite aggressively.  My experience has been that clients appreciate the honesty and are willing to embrace a trend-following approach that deals very effectively with not being able to see into the future.

—-this article originally appeared 1/12/2010.  More than two years later, many clients are still on the sidelines.    Many of them definitely do engage in inappropriate extrapolation!  An advisor’s first duty is to be honest, but you’ve got to do it in a way that is motivating and not paralyzing.

One Response to From the Archives: Two Approaches to Motivating Clients

  1. KeithB says:

    Unfortunately not everybody in the financial industry thinks like DWA. This managing director, as well as many ‘product’ sellers must always be positive and tell people things will always get better in order the pitch their products. While I believe we should all have a streak of optimism it should not be in our ability to hope for the best, but in our ability to watch what is happening, make an assessment of the situatoin and take the appropriate action.
    You are 100% right about being honest and playing the best with the cards you are dealt.
    I do believe in behavioral economics and behavioral finance, but unfortunately product pushers manipulate it to get people to ‘buy in’ to their products. They want people to think there is a ‘full house’ coming all the time so investors will buy, buy, buy.
    Thanks for your excellent site and insight.