Teaching Moments: Help Clients Shake the Emotional Hangovers

Sue BerginSue Bergin, President, S Bergin Communications

While the I-make-a-decision-and-forget-about-it approach might have worked for Harry S. Truman, it does not describe the vast majority of today’s investors.

According to our recent Brinker Barometer advisor survey[1], only 22% of advisors clients embrace Truman’s philosophy. The vast majority of clients suffer from emotional hangovers after periods of poor performance. They let the poor investment performance impact future decisions. Sometimes, it is for the better. In fact, 31% of clients made wiser decisions after learning from poor investment performance. Nearly half of the respondents, however, claimed that emotions cloud the investment decision following poor performance.

Bergin_LiveWithDecisions_7.30.14Another recent study, led by a London Business School, sheds light on how advisors can increase satisfaction by helping clients make peace with their decisions. According to the research, acts of closure can help prevent clients from ruminating over missed opportunities. To illustrate the point, researchers simply asked participants to choose a chocolate from a large selection. After the choice had been made, researchers put a transparent lid over the display for some participants but left the display open for others. Participants with the covered tray were more satisfied with their choices (6.30 vs. 4.78 on a 7 point scale) than people who did not have the selection covered after selecting their treat.

While the study was done with chocolate and not portfolio allocations, behavioral finance expert Dr. Daniel Crosby says that it can still provide useful insights on helping clients avoid what Vegas calls, “throwing good money after bad,” and psychology pundits refer to as the “sunk-cost fallacy.”

“Many clients are so averse to loss that they will follow a bad financial decision that resulted in a loss with one or more risky decisions aimed at recouping the money. If you detect that a client is letting emotional residue taint future decisions you should counsel them to consider the poor performance as a lesson learned. This will allow the client to grow from the experience rather than doubling the damage in a fit of excessive emotionality,” Crosby explains.

[1] Brinker Barometer survey, 1Q14. 275 respondents

The views expressed are those of Brinker Capital and are for informational purposes only.

Second Opinions on Investment Performance By Sue Bergin

There was a day when you could sense when someone was looking over your shoulder. Technology, however, has made those days a thing of the past.

With the increasing number and sophistication of personal financial management software sites and mobile applications, it is getting easier for your clients to get second opinions on the investment advice you provide.

Technology-driven portfolio analysis boasts the ability to provide independent and objective investment evaluation, which is appealing to investors on a few levels. From a client’s perspective, they can get a second opinion on your recommendations at no charge, with no obligation, and relatively little effort. Once data is entered, they have a convenient place to go for aggregated and up-to-date information and continual guidance.

The functionality and sophistication of these personal financial management sites and mobile applications is evolving at warp speed. Take SigFig for an example. SigFig aggregates all investment holdings then makes recommendations based on current holdings. It compares the holdings in a user’s portfolio against other investments in the same category and share class. It then provides suggestions of other, less expensive investments that perform better than the user’s current holdings. It even goes a step further. After reviewing the user’s trading patterns, it evaluates the brokerage fees paid. Even individual advisors are evaluated based on the fees assessed and performance obtained. This functionality has led to all kinds of provocative “Find out if your financial advisor is overcharging you” headlines!

Another media darling is Jemstep, which scored a “Use Jemstep to See if Your Broker is Wasting Your Money” headline. Jemstep’s ranking engine analyzes 80 attributes of more than 20,000 mutual funds and ETFs.
Jemstep helps clients identify their financial goals, provides a ranked list of the “best investment options” for that client, and tracks aggregated investment performance.

These services and dozens of others are gaining in popularity. They are free or come at a modest fee, and they have seized the attention of both venture capitalists and the media. Your tech savvy clients are likely to be aware of them, and very well may be relying on them for a second opinion of your performance.