An Advisor's Role as Behavioral Coach

The financial advisory field is rife with talented professionals who do a great job of managing their clients’ portfolios and developing strong, tax-smart strategies for retirement and other life events. Advisors' real value lies in managing client behavior. Their mission is to keep their clients focused on their goals, even as their short-term objectives may change.

It’s how well you perform this crucial aspect of your role as their advisor that will determine how well you serve your clients. This holds especially true during periods of stock market volatility.

While a departure from the new normal, the market volatility that has punctuated the first quarter of 2018 is still markedly lower than we’ve seen in the past. It’s certainly nowhere near what investors experienced during the most recent financial crisis. While the Dow Jones Industrial Average has declined significantly in terms of raw numbers, the index is only a bit more than 2 percent off of its January open.

Of course, relatively limited declines are still declines, and it’s highly probably that a number of your clients are starting to feel spooked by recent events. We are in the midst of year nine of a significant bull market and the past year offered clients significant gains with markedly little volatility.

This type of uneasiness can cause clients to panic and make emotionally based investment decisions in an attempt to “lock in” gains. It’s up to you as their advisor and behavioral coach to step in and keep them invested in accordance with your agreed-upon plan.

A recent Vanguard study estimates that an advisor adds about 3% of “advisor alpha” annually. That is, working with a financial advisor adds an average of 3% to a client’s portfolio over time. The majority of this value is added during periods of heightened greed and fear in the markets, when advisors can step in and help their clients stick with their investment plan, even when their emotions are driving them to do something else. About one-half of this extra return comes from the behavioral coaching that top advisors routinely provide to their clients.

Financial advisors who bring a process-oriented approach to their clients’ financial plan are helping to shape their clients’ behavior. Systematic reviews, periodic rebalancing, proper asset location and spending plans are all examples of behavioral coaching. These and other strategies help clients make financial decisions in an ordered, rational fashion, rather than putting them in a position to react to news about the stock market or the economy.

The best financial advisors play a number of roles: investment manager, relationship manager, entrepreneur. But the key trait that the best financial advisors share is that they’re outstanding listeners. They take the time to sit down with their clients and prospects and discern their concerns, hopes and goals: how do they feel about money? What financial issues keep them up at night?

In order to be a strong behavioral coach, it’s important to have a baseline for each client. Understanding their concerns, goals and fears is a starting point from which you will be able to help steer their financial behavior. When prospecting, active listening will help you to catch red flags that would lead you to suggest that you may not be the best advisor for their particular situation.

In the face of downward fee pressure and the commodification of traditional advisory practices, advisors are increasingly trying to add new services to their toolkit. Enterprising advisors use services like behavioral coaching to then help clients navigate life decisions, such as where to retire to, from both a values-oriented and a financial standpoint.

For example, in the aforementioned scenario, while it might make financial sense to relocate to a lower-cost area of the country, will your client really be happy living far from her friends and family?

Advisors who integrate their clients’ values and nonfinancial concerns with their financial plans will increasingly have a leg up on other advisors who are more one-dimensional. This approach can help you achieve client buy-in and deepen their commitment to the financial plan that you construct with them.

Money is about more than dollar signs. A financial plan needs to be tied to a client’s emotions and values in order to resonate. Advisors’ who understand this dynamic are better able to manage their clients’ money behavior to their long-term financial benefit.