Welcome to Financial Advisor IQ

Trickery and Familiarity Can Bring Clients to Heel

By Thomas Coyle February 9, 2017

Would you rather be nagged into good behavior or tricked into it?

Most people would rather be tricked, says Kol Birke, an executive of Commonwealth Financial Network. In the context of providing financial advice, however, tricking people outright is a definite no-no, he adds.

“Advisors have a moral responsibility to do what’s best for their clients,” he says. And most FAs strive to balance positive results with the means by which they’re accomplished, he says.

“Advisors tell me they sleep at night when they help clients achieve their goals” but they’re not willing to sacrifice their integrity – by using outright falsehoods or misleading clients – to do so, says Birke.

When it comes to using trickery to help clients, what advisors get up to is pretty benign anyway, he says, with the ultimate goal to help clients fight against primitive instincts that, if followed, would lead them to financial ruin.

For instance, Birke says he’s heard of advisors using the behavioral finance foible of anchoring bias — the tendency to fixate on previous, perhaps outdated information when making an investment decision — to the client’s benefit.

While anchoring can cloud investors’ views of outcomes by getting them hung up on short-term benchmark comparisons instead of real-life outcomes, it can also get clients to be more patient. For instance, pointing out that most of an FA’s other clients defer Social Security payments until they’re 70 — when payments are higher — can help a particular client resist the temptation to take less sooner, says Birke.

The Commonwealth executive adds that other advisors urge their clients to make “Ulysses” pacts — named for the Greek hero who resisted the sirens’ call to doom. In this scenario, a client might agree to forego a luxury item until other goals are met or certain tasks, like getting a will and testament squared away, are seen to.

Rick Kahler

That type of advisor behavior is fine as long as it’s not manipulative, says Rick Kahler of Kahler Financial Group in Rapid City, S.D.

In fact, Kahler says it’s best to stay aboveboard with clients at all times. This means probing clients’ behavioral finance foibles and calling them on transgressions — acting on an innate distrust of markets or refusing to see occasional losses for what they are — as they crop up without resorting to subterfuge.

And like Birke, Kahler — who manages about $200 million — says this process is helped along by knowing clients very well. In such cases, a well-timed eye roll can be as persuasive as a stack of charts.

Michael Pompian is an investment consultant with Conway/Sunpointe near St. Louis who advises family offices, ultra-wealthy individuals and family foundations. He also writes extensively about behavioral finance.

In helping clients overcome behavioral foibles, he says it’s useful to understand “behavioral investor types” — a process that starts with determining whether a client wants to take an active or passive role and then how tolerant they are of risk. From there Pompian takes clients through questions designed to determine their investor types — such as “followers,” “preservers,” and “accumulators,” among others.

The point is to facilitate appropriate discussions. For instance, some personality types relish frank discussions along the lines of, “Hey, your bias is handicapping you right now,” while others call for FAs “to address things without really addressing.”

So if mental accounting leads a client to stockpile cash that could be put to better use elsewhere, it might be well to say something like, “Look at all the cash here,” says Pompian. “That’s interesting. Maybe we should examine that together.”

Adds Pompian: “The fact is, some approaches work better with some clients than with others — and some clients want intimate relationships with their advisors and some don’t. You have to use your judgment.”