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Written by: Ken Haman
Most advisors say that they have two different kinds of clients: those who require only an occasional check-in phone call and a review once a year and those who seem to call all the time. Neither type is ideal. Low-maintenance clients don’t return calls, and they resist coming in for annual reviews. High-maintenance clients want to talk about their investments and the markets every time something happens.
At first glance, these two types of clients appear to be very different. But if we take a closer look, we will see some similarities.
What’s Going on Here?
According to behavioral economist Daniel Kahneman, the human brain uses two systems to make decisions. The first, an emotional “fast-thinking” system, is used for quick or easy decisions. The second, a logical “slow-thinking” system, is used when careful deliberation is required.
The slow-thinking system requires a lot of energy and becomes fatigued when asked to work on big challenges. At that point, emotional fast thinking takes over. The slower system also shuts down when we feel threatened. Even a potential loss in our portfolios causes our brains to automatically shift to more instinctive fast thinking in order to respond quickly.
This insight helps us understand the two types of clients we considered earlier. High-maintenance clients are reacting to threatening developments in their investments. Their deliberate and logical slow-thinking systems have become exhausted, and they revert to an instinctive, emotional response. They’re eager to react to the problem and instinctively want to take action. Low-maintenance clients become just as activated by their self-protective instincts. The difference is in what they’re reacting to. They have a different set of priorities.
What’s the Priority?
For high-maintenance clients, an investment represents one of their biggest priorities. In many cases, investment results may be the most important source for feelings of security. But many low-maintenance clients are uniquely successful people. For them, the accumulation of wealth has been accompanied by the accumulation of other complicated dynamics in their lives. This means that another area of their life is more important than their investments.
The Challenge of Complexity
For many high-net-worth individuals, their business or professional life is overflowing with challenges that require attention. Business, health or family might be paramount. Managing daily life may overwhelm their capacity to process one more concern. The complexity makes them zoom in and focus on the most urgent problems. This tendency, called narrow framing, is the reason that low-maintenance clients don’t ask as much from you as other clients. It’s not that they don’t have reason to be concerned; rather, it’s that they don’t have the capacity to be concerned about many other issues.
What Does This Have to Do with Being a Financial Advisor?
A client-facing financial advisor must meet each client at his point of greatest need. For high-maintenance clients whose investments are their highest priority, this means anticipating their emotional needs, especially when markets become volatile. These clients benefit from having a highly detailed financial plan that includes a stochastic calculation about the likelihood of achieving their desired future outcomes. They also benefit from their advisor setting expectations early in the relationship, anticipating times of market dislocation and conducting regular conversations that help them reengage the slow-thinking part of the brain when emotions have taken over. (For more on managing these kinds of conversations, see the AllianceBernstein Advisor Institute’s execution guide Managing the Hard Conversation.)
Low-maintenance clients are just as likely to react intensely to losses in their portfolios. In fact, because they tend to use narrow framing with other issues, they may be caught off guard by an unexpected negative result.
Don’t assume that everything is fine with your low-maintenance clients. Instead, call their attention to their financial plan. A conversation can be a good way to break through and activate their fast-thinking system. Whether you get them on the phone or have to leave a message, say, “I have a concern about your portfolio and your financial plan, and I’d like to talk with you about it in the near future. When is a good time for you?” This shifts their self-protective instincts from other distractions and galvanizes their attention on their investments, at least for the current moment.
Experience shows that you will have to leave only one or two messages like this before you get a return call. When you get the client on the phone, move the conversation quickly to the reason for concern and the actions that you are recommending. You will probably find that those low-maintenance clients now look more like high-maintenance engagements.
Related: In Volatile Markets, Remember This One Important Lesson from Psychology