Be the thermostat not the thermometer, advisors told

Behavioural finance expert explains how advisors can add value through regulating the temperature of their client conversations

Be the thermostat not the thermometer, advisors told

Advisors have been urged to be a thermostat rather than the thermometer for their clients and introduce more emotional intelligence into the relationship.

Anne Hoare, Solutions Director for SEI Canada, is a behavioural finance expert whose interest in the subject was piqued through her two daughters. Both have anxiety, and in the case of a parent, it’s vital in times of stress or panic to set the temperature for the conversation.

While the thermometer tells you the temperature, the thermostat is what regulates it. And Hoare believes this can be applied just as easily to the advisor-client relationship. For example, if a client insists on putting a significant portion of assets into Bitcoin, or any other investment, the advisor's role is to bring that conversation down to something a little more tempered so a reasonable decision can be made.

Hoare said that this seems particularly relevant as we come out of a pandemic. “When your client comes to you, and they're freaking out because they've lost their job, and they're not sure what that means for their plan, advisors are also seeing their own livelihood have some challenges.

“But if they bring that emotion into the conversation, it's not going to help their clients. You can't regulate anyone else's emotions if you yourself are dysregulated. So you have to be the thermostat and the calm voice of reason in those interactions.

“Then your job really is to cool down your client so that you can get to a place of rational conversation, not dismissing that there's emotion but recognizing it, and then trying to get to a place where you can have better decision-making ability.”

Getting to know the client, asking the right questions and really establishing trust are key to effective behavioural finance. Often this involves dealing with a client’s perception of a problem compared to the reality. Maybe that means explaining portfolio dips and paper losses versus unrealized losses.

Hoare believes this aspect of advice is where professionals can add real value. There will be times when the client reaches out and they need to know that they won’t judged and that the conversation will be taken seriously.

She said: “They’re kind of awkward these conversations, and they require a certain amount of emotional intelligence on both sides of that relationship. But if you set it up so the client knows you are going to have them and that this is how you add value, it may be easier to dive into.”

Of course, this reflects a shift in the industry from stock-picker to a more holistic advisory approch. Investments are being commoditized so the value-add has moved away from simply choosing funds to planning and client relationships.

Within that, the advisor must make sure the client stays the course through good times and bad. Hoare added: “It’s about recognizing that this can be emotional and people have urges to [change the plan]. But advisors have the tools and strategies to help them avoid making those mistakes – and that is the work of the behavioral coach and the emotionally intelligent.”