Financial advising is a natural fit for rational, analytic professionals who think from a place of logic.
At least, that is how the field is often seen.
But your clients make their decisions, including which advisor to entrust with their financial concerns, from a place of emotion . By understanding the psychology behind your clients’ state of mind, you can improve and strengthen client relationships, anticipate their needs and predict their future behaviors.
There is a subtle, but significant, difference between managing a portfolio and managing all of a client’s needs and expectations. Given the geopolitical tensions and market volatility clients have faced this year, it has never been more important to understand what is driving them to act the way they do. Too often, advisors think only from a technical perspective. They rarely realize until it’s too late that a great technical solution to a financial problem may be emotionally unacceptable to a client.
Likability, competence and trust are the criteria that most clients base their decision on when choosing a financial advisor. Trust, the most important of these three, is what keeps clients happy and loyal over the course of years. Financial advisors must get to the bottom of the needs of their clients on every level – that’s where trust is built, and that’s where advisors will be able to actually do what they do best and provide advice that will be heeded and, beyond that, valued.
Let’s look how advisors can identify the three basic motives underlying client behaviors.
What drives client behavior?
Every client has a goal. While on the surface it may appear to be something simple, such as save for retirement or preserve capital, there is always an underlying cause influencing what their goals are and the path they are most comfortable taking to reach them. This becomes especially evident in times of uncertainty. In the face of strong emotions, reason and logic depart from the equation. It sounds simple enough on paper, but it is also why many clients buy high, sell low or cash out at the wrong time. No matter the science, they will blame their financial advisor when the results aren’t what they were expecting.
A client put into an uncomfortable situation will cease thinking with their pre-frontal cortex or “thinking brain,” and their primitive brain will take over. They revert to their primal instinct of flight, fight or freeze . The context and the temperament of the individual determine their default approach. The goal of an advisor shouldn’t be just to stop clients from irrational reactions; it is paramount that advisors acknowledge the symptom, analyze the client’s unique situation and delve into addressing the underlying cause.
There are three basic drivers of influence . The next step is to identify which is piloting a client:
1. Greed – Pleasure seeking
Clients whose instincts are driven by greed are more open to taking risks with their financial strategy and are in search of short-term gains. They want instant gratification, measurable returns and may not excel at looking at the long-term big picture. They are more opportunistic and are looking for their advisor to suggest avenues that will lead to a quick buck.
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2. Fear – Pain avoidance
Clients who operate under the driver of fear are afraid. They are afraid of losing money and anxious about incorporating risk into their portfolios. These are clients who perhaps have not moved very often or who have a large number of financial obligations. Panicking at headlines and selling low is one example of a typical response from these clients.
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3. Ego – Preserving status
Clients operating under the driver of ego are working to build or preserve their social standing. They are seeking to “keep up with the Joneses” and are in search of bragging rights. Growing their wealth to purchase big-ticket items and holding onto those status symbols is more important to them than the necessary actions that will fortify their financial future.
Once a financial advisor diagnoses which driver of influence has predominant control over the client, it will be easier to anticipate how they will react in a time of stress and connect with them to address the real underlying cause. In doing so, advisors will be able to earn the client’s trust and increase their own confidence in recommending their plan of action.
Instead of waiting to see how a client will react and then providing a temporary solution to the symptom, an advisor who is able to diagnose their client’s deeper concern, make them feel comfortable and return them to a calmer state of mind is going to have more success and be valued by their client in the long run.
Helping clients realize what is driving them is also an important component of building trust. It is possible to gauge how a client will react in a turbulent situation just by observing their behavior and habits as they deal with other areas of their life.
Clients who have moved great distances, travel more often or try new foods are likely to be more risk-friendly when it comes to their finances. Those who still live in the town they grew up in or default to tried-and-true restaurants or vacation spots tend to be more risk-averse.
Engaging clients in these conversations and listening to them will help advisors identify patterns of behaviors and anticipate future bumps in the road. One of the biggest tributes is listening to someone. Doing so will forge a connection and open the door to a more personal, trust-based relationship.
Recognizing and acknowledging what motivates each client is key to enabling the client to feel secure, thus allowing their advisor to illuminate the blind spots and guide them towards the right decisions in the future.