Advisors need to be emotional shock absorbers

Contrary to popular belief, making money is not the goal of investment. Money is a currency that buys emotional gifts. These gifts could be safety, security, freedom or self esteem; unique reasons why people invest money.

It is imperative, therefore, that financial advisors address and mitigate clients’ behavioral biases, says Frank Murtha, managing director, Market Psych LLC, a consulting group that offers advanced training and experience in finance and clinical psychology.

“There is nothing more emotional and irrational than the relationship people have with their money,” said Murtha, a frequent speaker about investor psychology and behavioural finance, speaking to a lunchtime audience at the annual Mackenzie University symposium hosted by Mackenzie Investments, in Toronto.

Behavioural finance, he says, is a fancy term for investing emotion. “It involves dealing with client emotions so you can increase your impact on them.” Financial advisors must spend as much time managing their clients’ emotions as they do managing their money.

Fear and greed, always at odds, are the two strongest emotions at play in investing. “Fear crushes greed; it’s not a fair fight because the pain of loss and its emotional imprint is two-and-a-half times greater than the joy [of gain],” said Murtha.

Financial losses and their emotional impacts are like little pebbles in the client’s shoe and they need to be cleared out by financial advisors, he added. “There is a lot of research that supports the role of a financial advisor,” he said, “Part of the reason that [the role of] advisors is so valuable is because it helps clients overcome their emotions. Clients experience half as much negativity when they’re working with a financial advisor than when they’re not.”

Most of us make the mistake of asking agitated people to calm down or asking those who are depressed to cheer up, he said. “The best thing you can do is not shut down that emotion, but let it come out and dry it out.”

Clients need to have some emotional release before they become emotionally malleable and become open to an advisor’s reasoning and recommendations. “The best way to do that,” he said, “is to ask questions and let them talk and get things off their chest. All emotions linger until they are actively discharged.”

He calls it the “Oprah method” referring to the approach used frequently by Oprah Winfrey to draw out conversation. The approach, he says, can help advisors meet the client’s emotional need for caring.

Care is one of the three pillars of trust on which a client-advisor relationship rests. “The client has to know you care.” Sharing a client’s distress frees up the possibility of talking to their rational side, he added.

The next step is to describe the client’s concerns so as to ensure they are understood correctly. “It’s a subtle step but a really important one because it really pays to be on the same page as our client.”

Finally, empathize. Sincere empathy eliminates distress. Walk in your clients shoes and validate their feelings, said Murtha.

A lot has been said and written about what to say to a client. Murtha goes a step further and talks about what not to say to a client; something that helps advisors side-step many conversational landmines.

For starters, he urges advisors to banish certain phrases from their vocabulary. “Never tell a client ‘I know exactly how you feel’.”

Anyone who uses that phrase runs the risk of inviting a nasty response. A better response, Murtha suggests, could be “I can only imagine how you feel.”

Use the word ‘but’ sparingly when talking to emotional clients. “When you use the word ‘but’ in a conversation, what you’ve done is invalidated everything that came before,” he said.

Last but not least, promise and deliver. Murtha calls it a “low hanging fruit.”

“Talk is cheap; talking will only get you so far,” he said. “What the client really needs to get is that your words are consistent with your actions.”

When it comes to client trust, advisors who promise by the yard and perform by the inch often shoot themselves in the foot.

“It doesn’t matter what you promise, as long as they see some consistence between words and action,” said Murtha. And no one wants to see this more than anxious clients.