As many of you are working in the financial services industry, you have become accustomed to the standard way of doing things. There are models of investor behavior that in large part determine how you communicate with clients and what recommendations you make for their financial portfolios. But I'd like to tell you a little bit more about how that narrow approach often does financial advisors a disservice and fails to provide the necessary information to give clients optimal service.
Financial investment is often approached with great care, both by advisors and individual investors. For the investor, their life savings could be on the line, and they have to balance their desire for wealth with the reality that not all investments will pan out at the end of the day. As advisors, it's vital to understand a client's risk tolerance and ensure they are well-informed about the potential pitfalls of any financial investment.
Typically, assessing a client's risk tolerance has been achieved through questionnaires that look at a client's financial experience, as well as demographics like age, income, length of investment and amount available to put into a new portfolio. But this approach often falls short of looking at the other concerns that underlie every investor's feelings about her financial situation.
Risk and Loss as Human Experiences
Most importantly, advisors should understand that clients often have a complex relationship to loss. While it's easy for financial experts to look at numbers on a piece of paper and understand they will fluctuate from day to day, for clients, this can be a nerve-wracking experience. Advisors should understand that this attachment to their portfolio is not just about cash but what that cash represents.
In any life, there is great loss. Human losses include death of family members, moving cities and the resulting loss of community, and job transitions that lead to loss of positions and social circles. Loss has a potentially devastating impact on a client's individual self-esteem, often subconsciously reflected in their feelings about their investment portfolio.
Using Investment Psychology to Serve Clients
Advisors have a duty to act responsibly toward their clients by recommending investment options that serve their short- and long-term interests. Advisors earn their commissions in part by offering wise counsel to people who come to them for advice. In order to give the best advice, it's important for advisors to understand the complex psychology behind investing.
For many advisors, having an in-office therapy session is not necessary or even appropriate. Advisors must maintain a decorum of professionalism and offer objective advice while keeping the individual client in mind. But there are other ways to look more deeply into an individual client's motivation in order to best serve their needs as they build a financial portfolio that satisfies their desire for long-term wealth.
Financial Software That Gives a Complex Picture
In order to go in depth to provide financial services that excel, you do not need to get a degree in psychology. Teams have already developed sophisticated software that gives you the knowledge you need to make an assessment, both for market forces as a whole and the behavior of your individual clients. Learn more about these tools so you can enter the new world of investing, where clients' fears are acknowledged and their confidence in you as their advisor is justified.