How behavioral fixes can help advisor-client relationships

The divided self, biases, and the “I don’t need to know” mindset are just some challenges that advisors must overcome

While investment decisions tend to be based on numbers, it is also affected by sentiment and attitude, psychological factors that, if not properly put in check, can lead to decisions that are not in the client’s best interest.

The fact that investment decisions can never be made with perfect information introduces uncertainty. It opens the door to something social scientist Jonathan Haidt calls the ‘divided self,’ according to Mimmi Kheddache Jendeby of State Street’s Center for Applied Research, as reported by Financial Advisor IQ.

The divided self is a concept that models contradictory and conflicting interests in the same individual. With such a fractured lens, making progressive decisions and having productive conversations can be difficult – not just for clients, but also for advisors. “If we don’t recognize the divided self, we hinder our own learning and we let investors’ habits and unquestioned assumptions keep them away from their financial goals,” Kheddache Jendeby said. “We focus on solving problems within the system when sometimes we need to change the system.”

One way to protect advisors from the hazardous influence of the divided self is to put everyone on the same page. This important aspect of communication is not lost on Regions Bank Chief Investment Officer Alan McKnight. “We work to establish common metrics so we’re speaking the same language,” he said. Having a shared parlance helps “ensure our biases don’t interfere” with consistent and disciplined service, which helps convey to clients that they’re paying for skill rather than luck, according to McKnight.

Making rational investment decisions can also be challenging when the clients themselves are not invested in the process. “So many people think they hire an FA and don’t need to know what’s going on,” said Mike Brown, partner and portfolio manager at Dowling and Yahnke. “We want people to understand the strategy and philosophy of what we’re doing and really understand what’s going on.”

For Brown, a client who is educated about market dynamics and asks the right questions tends to be more rational and better to deal with.

“When the market is down and they ask if we’re going to buy, you can tell they understand what we’re trying to do,” he said. “[On the other hand], where you get a lot of the wrong questions, either more learning is required, or it’s just a bad fit. We’re in the business of educating, not selling.”

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