Rewriting the rules of engagement for advisors and their clients
by John DiehlMr. Diehl is senior vice president of Strategic Markets for Hartford Funds. He also oversees Hartford Funds’ collaboration with the Massachusetts Institute of Technology AgeLab. Connect with him by e-mail: [email protected]
The economy of the past five years can be best characterized by the Chinese proverb, “…may you live in interesting times.” Consumers’ financial experiences have been punctuated by the collapse of some of the world’s largest financial institutions, bank bailouts, high-profile prosecutions of financial fraud and the downturn of the stock market.
Just when there might be hints of economic improvement, new data and reports suggest a weaker-than-expected recovery or the possibility of foreign market instability contributing to greater domestic uncertainty, leaving consumers feeling downright shell-shocked. While seasoned financial experts understand the natural ebb and flow of the markets, average investors feel genuine fear and see no relief in sight, turning their fear into chronic investing anxiety.
Investment certainty now trumps performance
It is becoming more commonplace for financial advisers to see anxiety drive and adversely impact clients’ financial planning and investment decisions. A recent Hartford Funds survey revealed that Americans’ uncertainty and anxiety are motivating their financial decisions, with nearly 60 percent of advisers noting that this has negatively affected investments. Additionally, 76 percent of respondents noted that their clients are prioritizing investment certainty, specifically mitigating downside risk, over the potential for higher returns and long-term investment growth.
When asked about client anxiety as it relates to various investment vehicles, advisers overwhelmingly cited emerging-market funds as stress-inducers.
Ninety percent of advisers polled indicated that these products caused the greatest anxiety among clients, while 65 percent of advisers said international-bond funds are also a cause for client anxiety. On the other hand, seventy-three percent of respondents indicated that clients were least apprehensive about equity-value fund products and 68 percent cited corporate-bond fund products as the least concerning.
Today, more than ever, volatile markets, an uncertain economic environment and negative headlines are to blame for stress and anxiety around investing. Given the rising rate environment, Fed tapering and overall limited opportunities for yield in the bond market, investors have started rotating cash out of fixed-income investments and into equities. Sixty-six percent of advisers surveyed indicated that the threat of rising interest rates influenced their decision to seek out alternatives to fixed-income investing. While this asset class has traditionally been seen as more volatile, the more attractive long-term return prospects of stocks outweighs the potential downside.
There’s no question that client anxiety, largely induced by today’s economic climate, affects financial planning and the overall adviser-client relationship. This has been an area of ongoing focus for Hartford Funds through our research relationship with the MIT AgeLab. Based on AgeLab’s insights, we have been able to educate advisers and their clients about anxiety-driven predispositions which may lead to faulty assessments of financial planning and investment alternatives.
While there are physical, emotional, and cognitive impacts to consider, advisers can recognize and address certain behaviors to ensure that their clients continue to effectively pursue their wealth-management goals. Three behavioral patters to watch for are:
- Focusing attention on the negative
How many times do you hear people blame the media for the negative headlines that we read every day? In fact, we may have ourselves, not the media, to blame. Clients living in an unsettled environment may actually seek out negative information. Our cognitive systems are wired to be on the lookout for the next threat. Given the prevalence of media and all the ways to consume it, there is no shortage of negative sentiment for clients to focus on. Dr. Joe Coughlin, director of the AgeLab points out that in some cases, they may even seek negative information to support their growing belief that poor results are the likely outcome of nearly any action. For example, rather than seeking to learn more about a firm or a fund that has growth potential, anxious consumers will want more information about a recent jobs report showing a downward trend or to discuss the impact of uncertain foreign markets on the performance of the U.S. economy.
- A pessimistic attitude toward ambiguous or difficult to understand information
Anxious clients will tend to perceive any information that is ambiguous or difficult to understand as “bad news.” It is understandable that when the future is unclear, clients will tend to circle the wagons and demand certainty. Unfortunately, that certainty also may have a cost in the form of low returns and missed opportunities. Interestingly, the AgeLab informs us that in chaotic environments, a client’s perception of their own competence may be exaggerated, even being as great as the professional adviser. It is very important that the adviser frame the client relationship in the proper manner, not just in terms of nominal investment results. Given that financial planning and investment performance is inherently ambiguous, advisers need to be aware that anxious clients will believe there is a greater probability of negative outcomes.
- Prioritizing loss aversion over long-term investment growth
One area of observation in our research has considered how consumers “frame” their issues. Much can be learned from the questions they ask and the words that they use to express their feelings about issues or alternatives. In anxious environments, people will tend to prioritize “Just don’t lose it” over “How do we grow it?”. This may be due to behavioral aspects of “loss aversion theory,” which posits that losses may have twice the psychological impact as gains. This translates into a “fool me once” approach by investors who have had a negative financial experience in their past. Given the economic, investment and even personal trauma felt through our most recent economic crisis, it’s not hard to understand why those memories continue to haunt an anxious public even today. This focus on the past and short-term fears leads to the neglect of longer term, often more important issues.
Given the uncertainty of our current market environments – from emerging markets and interest rates to employment – we see rising levels of anxiety among clients impacting their ability to make rationally-based planning decisions to meet their longer term goals.
Professional advisers, are learning that it is important, as doctors know, ‘to treat the whole patient, not just a condition’ and therefore build a trusted relationship with their clients. As financial advisers, we must be able to converse in a more empathetic mode versus communicating “just the facts.” Information is available just about anywhere, but good advice is not. The new name of the game for advisers is “engagement.” How can we engage our clients so that we can encourage them to address the issues that matter most, rather than ignoring our phone calls, leaving their statements unopened, and stockpiling cash at nearly zero rates of return?
The MIT AgeLab offers a few suggestions:
- Understand what motivates
How well do you know your best clients? Do you know where they were educated? Do you know where they recreate? Congregate? Donate? The answers to these questions will tell you a great deal about what your client truly values. Beginning conversations based on these fundamental motivators relating to self, family, friends may help to lower short-term anxiety and focus on long-term goals.
- Point to the positive
As discussed, the headlines will take care of “feeding the beast” with negative input. But who is telling your client of positive developments in today’s economy? Shouldn’t it be you? The global economy is constantly changing, creating new opportunities for investment on an ongoing basis. Advisers frequently have access to resources that uncover opportunities that may otherwise be overlooked by their clients. As advisers, we need to counter the negative in order to start a more balanced conversation.
- Become an engaging educator
It’s not enough anymore to simply prescribe a solution and expect that our clients will act. Today’s consumer is much more educated with information at their fingertips. Advisers need to take an educational role and communicate changes in economic environments and their impact in ways that consumers can understand. That understanding can lead to greater confidence and trust in the eventual planning decision.
- Provide informed insights about past and future patterns
Mark Twain offered the wise insight that “History may not repeat itself, but it certainly rhymes.” Today’s client may feel like we are living in an environment that never existed before. In truth, although no two business cycles are ever the same, there may be lessons that can be gleaned from past market cycles. Providing insight on how markets had reacted in the past may help make the case for a more balanced portfolio through the addition or bolstering of a neglected asset class in portfolio construction.
- Facilitate action
Perhaps the worst state of mind that clients can embrace is apathy. The feeling that whatever they decide just “doesn’t matter” will lead to negative perceptions and inaction. However, even just a conversation can boost client confidence and help to manage fear. Don’t be afraid to give your client a little homework. Ask them to read an article about a given opportunity or situation and then ask them to provide some feedback. Lead them in reviewing one particular area of their plan rather than dumping it in their lap all at once. Focus them on taking that very next step toward better financial decision making.
Client anxiety is a reality advisers are facing daily, and current events and adviser sentiment suggest that it will remain elevated or even increase. Financial advisers must acknowledge this fear in the marketplace and seek opportunities to communicate with and educate clients to temper their concerns. A transparent and convivial relationship can provide clients with the reassurance they need to rationally make financial planning decisions to achieve their overall goals and objectives.