Investors prefer gains to losses. That alone — and quite apart from the sticky blob of needs, desires and preferences that accompany our every thought and action — is why some experts consider attempts to remove emotions from investing, and from financial affairs generally, as utter non-starters.

Put simply, when one outcome is sought over another, emotions creep in, they say. And when emotions creep in, so does irrationality, which increases the likelihood of errors and bad outcomes.

“People don’t like losing money,” says Dave Alison of Prosperity Capital Advisors in Westlake, Ohio. “Even the wealthiest individuals have an emotional bias toward their money.”

But, adds Allison, whose firm manages $665 million, all’s not lost on that account. “What advisors can do is set up guardrails to help people avoid making harmful decisions.”

The ascendance of this opinion, decades in the making, is bolstered by the recent award of the Nobel Prize in Economics to University of Chicago Professor Richard Thaler. A pioneer of behavioral finance, Thaler champions the view that — as he said on learning he was to win the prize — “economic agents are human” and “economic models have to incorporate that.”

And so, says wealth manager Chris White, do financial advisors who “want to be of use to their clients.”

White, a senior portfolio manager with Hemenway Trust Company in Salem, N.H., puts investor types in three categories. “Fixers” are wheeler-dealer, go-getter types, who are apt to take on too much risk in quest of winning. “Protectors” worry about the financial impact of their decisions on loved ones and can be overcautious. And “survivors” take so little interest in money, they can be difficult to inspire to make decisions at all.

“By the time an investor calls with a festering concern, you can’t say or do anything to change their behavior.”
Phil Toews
Toews Corporation

Further, White says, each category reacts differently in normal times and under stress. For instance, fixers, who are positive in outlook and seemingly eager for advice, can be pretty congenial for an advisor to work with. Under duress, however, fixers can get petulant and nurture irrational grudges, making them resistant, if not hostile, to advice.

White, who has a book on this topic, says the main takeaway for advisors is “spending more time getting close to clients and discovering their fears and values.” That’s in preparation for phases in a client’s life or in the market where, as an investor type, she may be inclined to panic, shut down or turn away.

Phil Toews runs Toews Corporation, a tactical and hedging-strategies firm in Northfield, N.J., with about $1.8 billion under management. Like other asset managers, he’s keen to provide value-add services to FAs — and do it in a way that stands out from a slew of rivals offering practice management insights.

So he went with something close to his heart: behavioral finance. To this end, his firm provides in-depth training to advisors on ways to be proactive about protecting clients from their inclination to seek gain and avoid loss at the wrong times.

In Toews’ view, getting his help and doing the work with clients now is less trouble than waiting for the next market downturn to force the issue.

“By the time an investor calls with a festering concern, you can’t say or do anything to change their behavior,” says Toews. “You just have to accept it.”

Chris White

Meanwhile, for Alison, a bucket approach seems the best antidote to emotional excesses in investing. That’s based on grouping client assets in cash for present needs, low-risk liquid vehicles for medium-term or what-if spending, and in less liquid and relatively riskier holdings for long-term accumulations.

And it isn’t just Alison’s wealth management clients who come in for this treatment. In addition to being an advisor in his own right, he trains other FAs in using buckets to instill clients with a sense of security about their money.

But, adds Alison, however an advisor works to keep clients on plan, “the number-one most critical aspect is education. If clients don’t understand why they're being asked to do something, then there’s a chance of misunderstandings that can lead to costly mistakes.”