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Written by: Joe Rosengarten | Wealth Professional
All advisors know that emotional investing is a real no-no. But while advisors learn how to remove emotion from their decisions, clients can struggle to act with a clear head when investments perform unexpectedly. For advisors, training clients to make thoughtful, less emotional decisions could be a game-changer.
“Behavioral coaching is based on the premise that all humans act irrationally with regards economic decisions,” says advisor and Founder of The Emotional Investor, Jay Mooreland. “Investors often say one thing and do another which is a great source of frustration amongst advisors: you’ve taken the time to develop a robust strategy only to have the client constantly question it or abandon it. Although the advisor gets frustrated, they should be expecting this irrational behaviour.”
Mooreland believes that modern risk profile questionnaires and optimizers, which are designed help develop plans with clients, are built on the faulty assumption that investors are rational. These tools do not fit the reality of day-to-day scenarios that all investors will experience. “Advisors need to realize that a major part of our job is to help clients stick with the plan,” Mooreland says. “The concept behind behavioural coaching is to provide the correct expectations and perceptions ahead of time; it’s all about being proactive. Decisions are influenced by perceptions, so if a client’s perceptions change that can alter their decisions.”
But how can an advisors go about adjusting their clients’ perceptions?
“Set the right expectations before the event happens,” Mooreland says. “You don’t play the whole baseball season and then do spring training. Behavioural coaching is something that needs to happen now, not when the client calls saying they want to get out of their investment.”
In an effort to remove the emotion from investing, it’s imperative for advisors to coach their clients on how to filter the commonly held views on volatility and market performance. If an advisor doesn’t teach a client where to gather this information and how to process it, investors will take their cues from friends and the noise of the media. “If we’re frustrated that our clients are acting poorly and abandoning strategies but we’re not explicitly coaching them the right things, then we have nobody to point fingers at but ourselves,” Mooreland says.
Mooreland believes that advisors need to understand that their role has to evolve: it needs to be more than planning, asset allocation and investment strategy. “Teaching clients to have the right perceptions and expectations can greatly enhance an advisor’s practice because it helps clients have a better investment experience,” he says. “Volatility is always going to happen, but if you teach a client to think about it in the right way they are less likely to get scared and abandon strategy when there is downward volatility.”