| March 21
March 21 In a perfect world, investors would be
calm, rational creatures who followed time-tested principles,
did their math and achieved lofty returns.
But in reality, fear and greed get in the way - and that is
where many advisers do their best work and spend much of their
time, coaching clients to stick with their plans despite
Mutual fund investors who follow their feelings instead of a
buy-and-hold strategy reduce their returns by 1.56 percent a
year, according to a 2007 study by Geoffrey C. Friesen and
Travis R.A. Sapp at the University of Nebraska-Lincoln. Between
2003 and 2013, emotion-driven investors made 2.49 percent less
than they would have if they stayed fully invested in mutual
funds, calculated research firm Morningstar.
Experts call that the "behavior gap".
THE ADVISER'S ROLE
To protect clients from those losses, advisers need to be
part behavioral coach and part circuit-breaker, dissuading
clients from chasing returns, says Fran Kinniry, a principal in
the Vanguard Investment Strategy Group, the wealth management
arm of fund company Vanguard.
That requires a long build-up of trust and some tough
conversations, says Kinniry. For example, clients may resist
when advisers tell them to rebalance their portfolios to
maintain planned asset allocations.
"You're trying to convince your investor to sell
top-performing investments and put them in bottom performing,"
he says. "It goes against human nature, intuition and what the
media is talking about. You have to find tactful, diplomatic
ways to help clients see the long-term benefit."
Brent Kessel, CEO of Los Angeles-based Abacus Wealth
Management, which oversees close to $1 billion in assets, has
been managing emotions and portfolios for high net worth clients
"People look at their statements, and fear kicks in, and the
'what ifs,'" he says. "I tell clients, 'There will be times when
your neighbor is doing better or things are going down more than
you want and you'll have doubt, but that's part of being an
Kessel, who once wrote a book about incorporating zen into
finances (It's Not About The Money: A Financial Game Plan for
Staying Safe, Sane and Calm in Any Economy, 2009), teaches
clients to be mindful of their emotions and to allow doubt
without questioning their entire strategy. He also has them
visualize portfolio losses of, say, 40 percent, to get a sense
of what they can handle.
If you play it safe with those issues that clients care
about most, they tend to be less afraid, says Karin Maloney
Stifler, a certified financial planner and founder of True
Wealth Advisors in Hudson, Ohio.
She uses the bucket system, dividing clients' money among
separate portfolios by goal. While a dream vacation may go in a
riskier portfolio, basic needs go into a conservatively crafted
Stifler also brings the science of investing into the
conversation and tells clients they might see some "ugly
numbers". "They think it's all about money; they don't know it's
an experience," she says.
Like Kessel, she talks them through a virtual market-drop,
and asks them if they can stick with her. When times do get
tough, she reminds her clients of the good reasons they chose
EMOTIONS AS FRIEND, NOT FOE
Advisers have been slow to address emotions in the planning
process, but those who have done so are seeing results. A 2007
study of 101 stock investors by Myeong-Gu Seo and Lisa Feldman
Barrett at the University of Maryland's Smith School of Business
may explain why. Investors who acknowledged, understood and
regulated the feelings that arose during decision-making
achieved higher investment returns, the study found.
In a recent white paper, London-based Barclays referred to
such increases as "anxiety-adjusted returns". On its website,
the company touts behavioral finance as being crucial to its
asset management strategy.
"We're human beings," says Julie Murphy Casserly, president
of Chicago-based JMC Wealth Management and the author of the
2008 book, The Emotion Behind Money: Building Wealth from the
Inside Out, on money and emotion. "You must include that part of
the equation in asset management."
She says she reduces anxiety by spending a lot of time
talking with clients to learn what drives their financial
decisions. She delves into their money history and shares her
personal stories about racking up credit card debt and losing
money before she understood the "why".
Sharon Doyle, a consultant, is a client who says Casserly's
approach not only helps her and her husband stay the course, it
improves the quality of their lives.
"She makes your financial goals about life, not money, and
it changes how you think about it," says Doyle.
(Editing by Linda Stern and Stephen Powell)