Blue Chip Journal - June 2019 edition

CLIENT COACHING
consider the level of risk they actually
need to take to achieve a particular return
or goal. But even a three-dimensional risk
profile does not capture the complexity of
a human being, particularly when it comes
to money and a person’s relationship with
money. Money goes to the core of our
being as humans and can impact our lives
hugely. Since the American Psychological
Association’s annual “Stress in America”
survey began in 2007, money consistently
has been the top stressor for Americans.
Coach your clients
and they won’t make
poor decisions
Human complexity is evident in
the drivers of investor behaviour
This complexity is evident when we
consider what actually drives investor
behaviour. Often we think it is simply
the emotions of greed and fear. They
certainly play a role. But our minds are
also problematic. Research suggests
we are prone to over 180 cognitive
biases that can influence our thinking
and decision-making. Organisational
psychologist Herbert Simon coined the
term “bounded rationality” to describe
our limits with respect to how we think
and make decisions.
To compound matters, as Daniel
Kahnemann points out in his book
Thinking Fast and Slow, we have two
brains, intuitive (fast) and reflective
(slow). The reality is that our brains are
lazy and like to take short cuts wherever
possible. These short cuts are often
driven by our intuitive brains, which
always look for the most obvious and
quickest solution. The problem is our
intuitive brain responds to immediate
triggers like falling markets or hungry
lions, and in some instances we make
good decisions, like running away from
the lion, but in other situations we make
bad decisions, like selling investments
when they are cheap.
Apart from our emotions and our
minds, which neuroscience suggests are
inextricably linked, a third influence on
our behaviour and decision-making is
other people. As social beings, humans are
susceptible to social pressure. This is often
a key driver of poor investor behaviour.
Investors love to compare the performance
of their investments. Or take the advice of
family, friends, colleagues and the media.
These are then used as ammunition
to challenge a financial advisor’s
advice or perspective.
Behavioural coaching can
help advisors handle their
clients’ complexity
It is no surprise, given the complexity
of human beings, that to
overcome poor investor behaviour
is a challenge. It explains why reputable
investment businesses like Vanguard and
Morningstar suggest that the most significant
value that a financial advisor offers
is behavioural coaching. US financial
advisor and author of the book Behavioural
Investment Counseling, Nick Murray,
believes that this value equates to Dalbar’s
behaviour penalty of 5%. He tells clients
that 80% of his value to them is coaching
them through the market's ups and downs.
The other 20% is helping them put a plan
in place and developing a strategy to fund
that plan. The coaching helps the clients
stick to the plan.
The message seems clear. To overcome
the challenge of investor behaviour, coach
your clients and they won’t make poor
decisions. Easier said than done, particularly
since financial advisors are human
themselves, and many poor decisions by
investors are in fact advised decisions.
The path of least resistance
perpetuates the investor
behaviour problem
My experience of working with financial
advisors is that often they take the path
of least resistance. If the client compares
performance, complains, or is just grumpy
about their investment, the temptation
for the advisor is to do something to
make them happy again. Unfortunately
this happiness is short term. Deviation
from a long-term strategy for short-term
happiness simply provides Dalbar with
another statistic to show how investors
underperform on their investments.
As any coach will tell you, no matter
the context, coaching is tough. It means
challenging your client. Pointing out where
they are making flawed assumptions.
Highlighting where they are not sticking
to commitments or taking personal
responsibility. A friend of mine who is an
executive coach tells his clients that they
will have a “fight” in their third or fourth
meeting and only if they get through that
will the relationship be able to continue.
The path of least resistance is not the
path to achieving goals. Being personable
is not enough to overcome the challenge of
investor behaviour. Engaging clients with a
coaching way of being and then dispensing
sound expert advice is what is needed.
Unfortunately, until now, the focus of advisor
training has been on expert advice. I believe
we will only overcome the challenge of poor
investor behaviour through real human
connection and the development of genuine
behavioural coaching skills.
References
Dalbar Quantitative Analysis of Investor
Behaviour, 2015
American Psychological Association, “Stress
in America” Surveys, 2007-2018.
Rob Macdonald, Fundhouse
54 www.bluechipjournal.co.za