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How to Help Clients Understand Investor Bias

By Crucial Clips     July 20, 2016
The following text is a transcript of a portion of a speaker's presentation made at an industry conference or during an interview. This transcript solely represents the view of the individual who spoke, and not the view of Financial Advisor IQ or any other group.
Source: FA-IQ, May. 10, 2016 

BRUCE LOVE, MANAGING EDITOR, FINANCIAL ADVISOR IQ: This is Bruce Love with Financial Advisor IQ, and I'm here with Michael Brady, president of Generosity Wealth Management. How can advisers equip themselves to understand investor bias better?

MICHAEL BRADY, FOUNDER, PRESIDENT, GENEROSITY WEALTH MANAGEMENT: I think the first step is to educate yourself about what all the biases there are out there, whether it's overconfidence, whether it's confirmation, recency. There's a significant number of biases out there. And I think you as the advisor first and foremost need to understand [that]. And perhaps you have some of them yourself. And be aware of them.

The second is a targeted communication program with your clients, whether they're existing or brand new prospective clients. Start to introduce through newsletters, through videos, through seminars perhaps one bias. Then add a second bias, then a third. And then pretty soon, it becomes the whole culture of your firm of how you communicate with clients talking about these behavioral finance, these particular biases that the clients need to be aware of.

And the third thing is to understand who your clientele is. Are they investors, or are they traders? And if they're investors, I define investors as those that are long-term who understand that things in a short term happen, but it's just deviations, small deviations, from where we're really trying to go, always keeping them on the long-term vision. And so I think that if this is something that you want to introduce to the relationship with clients and work with clients like that, understand that do you have investors or traders?

And if you've chosen, which is fine, to work with traders-- people who are more short term, who really want to get the next greatest thing and always try to do better than the guy down the street-- that's OK, too. Start to introduce those biases from a more short-term point of view so that it's not a gambling bias or a chasing returns, many of the types of things that can hurt short-term traders just like it can hurt long-term investors.

BRUCE LOVE: What practices have you implemented at your firm to help you to use these tenants of behavioral finance?

MICHAEL BRADY: One of the most important things that I've implemented in my firm is being very clear that my clients are investors — long-term, multiple year, and multiple decade investors. The second thing is communication. That is an absolute key part of my business. I do YouTube videos that I send out to clients on a-- sometimes, when things are happening very quickly in the market of there's lots of news, on a weekly basis. I've even done them on a daily basis so that they can get a very clear idea of how I feel so that they don't feel they have to call me or worry about what the nightly news has said. So communication through newsletters, through video, through seminars, etc. is a very key part of who I am and how I've set up my particular practice.

The third is relationship. You have to have a good relationship with your clients, because we don't know what the future holds. We don't know what speed bumps there might be or problems. So therefore, setting right from the beginning that you might not know everything, but you know how to get the answers. But you'll do it together in partnership, I think, is good, and setting the expectations that you can do this together, but you're hopefully a client and advisor relationship for many years and many decades, like a trusted advisor, a trusted family friend.

That's how I've set up my business, and I think that's how other advisors can best serve them. Because some of the conversations that we have can be uncomfortable. Perhaps the client is doing something that you think is not in their long-term interest. They have to understand that you have their best interests at heart when you give them some of that feedback. And so relationship is very important, communication is very important, and knowing what type of client. For me, they're long-term investors.

BRUCE LOVE: Understanding and implementing behavioral finance techniques and then communicating them with your clients takes time and effort and money. So is this something that you only do with your most wealthy clients, or is it something you do with everybody?

MICHAEL BRADY: I do this with every client who walks in the door or prospective client regardless of how big or profitable they might be to me. Because I feel that it's an investment up front that has many dividends for many years. If it's a smaller client, I still spend all that time. Because if I don't spend that time-- if I'm watching my watch and saying, OK, I've got to move this along very quickly-- that's the client who, six months, one year, two years down the road is calling. So it's going to, I believe, cost more in the long run than spending the time right up front.

BRUCE LOVE: Thank you, Michael.

MICHAEL BRADY: Thank you, Bruce.