Behavioral Finance – A Three-Part Model for Client Relationships

/in , , , /by

Behavioral finance can deepen your client relationships during market turmoil, if you recognize your clients’ emotional right-brained reactions before you offer insights based on your analytical left-brained analysis. By applying a three-pronged process of Recognize-Reflect-Respond, you can adapt to new information in a thoughtful and effective framework.

Gayle H. Buff, president of Buff Capital Management, proposed this model in “Behavioral Finance: So What?” her June 15 presentation to the Boston Security Analysts Society (BSAS). Buff has 20 years of experience working with individual investors and is a past president of the BSAS. As a member of the CFA Institute’s Speaker Retainer Program, she has spoken about behavioral finance to CFA societies around the world.


Continue reading my article, “Behavioral Finance – A Three-Part Model for Client Relationships,” in Advisor Perspectives.

Behavioral finance can deepen your client relationships

/in , , , , /by

Understanding behavioral finance can improve your client relationships. That’s the lesson I took away from “Behavioral Finance: So What?”, a June 15 presentation by Gayle H. Buff, president of Buff Capital Management, to the Boston Security Analysts Society (BSAS). Buff has 20 years of experience working with  individual investors and is a past president of the BSAS.

Like financial advisors, clients of investment and wealth managers don’t act with complete rationality. They react with their emotional right brain in addition to their rational, reflective left brain. However, Buff said, to optimize our ability to make informed decisions, we need to use both sides of our brains. Advisors who understand this, can tailor their interactions with clients to take advantage of this. 

Behavioral finance experts have identified loss aversion, uncertainty aversion, and overconfidence as a few of the key investor tendencies that reflect the influence of the right brain. During the past year’s financial crisis, Buff observed many instances where fear of uncertainty trumped fear of loss. Some of her clients wanted to sell their investments, even if that potentially meant locking in losses.

Behavioral finance helped Buff respond effectively to her clients who wanted to sell. Understanding that clients’ “sell” requests were intensely emotional, “I don’t take it personally or as them telling me I’ve done something bad,” she said. Instead of arguing with them, Buff listened to her clients’ fears. “Talking about what makes us afraid makes us less fearful,” she said.

It isn’t easy for most advisors to follow Buff’s strategy. “We often want to rush in with facts,” she said. However, advisors need first to acknowledge their clients’ feelings. Only after doing that does it make sense to give clients an alternative perspective on the issues. The advisor who takes this two-step approach will find their clients more receptive.

In fact, if advisors and clients can work through a financial crisis, they may end up with a much deeper relationship. One of the big advantages may be enhancing clients’ understanding of risk. Prior to the past year’s financial crisis, most clients overestimated their risk tolerance said Buff.

Buff listed five areas that advisors should explore with their clients, including clients’
1. Capacity to tolerate market volatility and economic risk
2. Characteristic defensive posture in the face of anxiety and uncertainty;
3. Vulnerabilities, passions, strengths, weaknesses, and dreams
4. Ability to process, integrate, and adapt to new information a new experience
5. Commitment to working collaboratively and synergistically as one-half of the advisor–client relationship

This blog post only touches on a tiny portion of Buff’s material, which included a bibliography on complexity theory and adaptive systems, behavioral finance and investor psychology, and the intersection of theory and practice. However, she speaks on behavioral finance to CFA societies around the world, so she may come to your area.

By the way, it has been my pleasure to get to know Gayle through volunteering with her on the BSAS’ Private Wealth Management committee. I’ve seen her dedication to financial education.

Guest post: Dale Carnegie and Your Clients

/in , , , /by

This is a guest post from AdvisorBlogger’s Lawain McNeil, which originally appeared on March 11. It’s an excellent reminder that it’s important to treat clients as individuals.

In 2009, I made a resolution to re-visit the book How to Win Friends and Influence People by Dale Carnegie. Of course, everyone has heard of this book (it has sold over 15 million copies). Its influence has been far reaching and helpful for many. Thanks Dale Carnegie.

Why do I mention him today? I think some of the principles of How to Win Friends and Influence People can be helpful in dealing with clients in the current state of the market. Even though the market was up the last two days, clients are still concerned about their investments. This will be very present to them when they open their quarter-end statements and see negative numbers and lower account balances. Yes, you will have clients that will want to argue with you regarding their investments. You will have clients that will want to change their allocation to a different allocation or strategy due to the market (even though they signed an investment policy statement saying they were a long-term investor). You will have clients that are afraid and just need reassurance.

So, as you prepare to talk, write, visit and meet with clients, revisit the words of a timeless classic and see if the Carnegie Principles can help you communicate more effectively with your clients.

DALE CARNEGIE’S HOW TO WIN FRIENDS and INFLUENCE PEOPLE

Fundamental Techniques in Handling People

1. Don’t criticize, condemn or complain.
2. Give honest and sincere appreciation.
3. Arouse in the other person an eager want.

Six ways to make people like you

1. Become genuinely interested in other people.
2. Smile.
3. Remember that a person’s name is to that person the sweetest and most important sound in any language.
4. Be a good listener. Encourage others to talk about themselves.
5. Talk in terms of the other person’s interests.
6. Make the other person feel important – and do it sincerely.

Win people to your way of thinking

1. The only way to get the best of an argument is to avoid it.
2. Show respect for the other person’s opinions. Never say, “You’re wrong.”
3. If you are wrong, admit it quickly and emphatically.
4. Begin in a friendly way.
5. Get the other person saying “yes, yes” immediately.
6. Let the other person do a great deal of the talking.
7. Let the other person feel that the idea is his or hers.
8. Try honestly to see things from the other person’s point of view.
9. Be sympathetic with the other person’s ideas and desires.
10. Appeal to the nobler motives.
11. Dramatize your ideas.
12. Throw down a challenge.

Be a Leader: How to Change People Without Giving Offense or Arousing Resentment

A leader’s job often includes changing your people’s attitudes and behavior. Some suggestions to accomplish this:

1. Begin with praise and honest appreciation.
2. Call attention to people’s mistakes indirectly.
3. Talk about your own mistakes before criticizing the other person.
4. Ask questions instead of giving direct orders.
5. Let the other person save face.
6. Praise the slightest improvement and praise every improvement. Be “hearty in your approbation and lavish in your praise.”
7. Give the other person a fine reputation to live up to.
8. Use encouragement. Make the fault seem easy to correct.
9. Make the other person happy about doing the thing you suggest.


Here’s how AdvisorBlogger describes its mission: “AdvisorBlogger is a website dedicated to providing valuable and timely resources for financial advisors through the use of blogging, podcasts, video and other rich media formats. Our goal is to become a leading online resource for the independent advisor community.” 

If you’re thinking about starting to blog…

/in , , , /by

… you can learn about the case for blogging and how to integrate it into your schedule. Just watch this YouTube interview with Denise Wakeman of The BlogSquad. The interview was conducted by Michael Stelzner of Writing White Papers.

One of Wakeman’s points applies to all of your marketing communications. Think about the problems you solve for your clients. Write about those and you’ll command their attention. It doesn’t matter whether you’re writing a blog post, quarterly client letter, newsletter article, or website.


Financial writer’s clinic: Great title, lousy intro

/in , , , /by

“When Will Housing Recover?” This title reeled me in. I flipped directly to the article, bypassing two others. But what I found disappointed me. I’ll use this article’s mistakes to suggest rules you can follow in your article introductions.

The writing problem: Boring introduction
Then article’s first paragraph stopped me cold. It held a long-winded description of a home price index’s composition. It’s information that I might exile to a footnote if I wrote a white paper on this topic.

Here’s the first sentence of the article: “The S&P/Case–Shiller Home Price indices measure the growth in value of residential real estate in various regions of the United States.”  The first paragraph devotes 247 words to the details of the markets tracked by these 23 indices.

Three rules for an interesting introduction
1. Answer the key question. That’s “What’s in it for your readers, if they slog through your article?” The authors nailed this question perfectly with their title. But they forgot about it when they wrote their introduction.
2. Keep it short. Direct marketers have discovered that readers start to lose interest once a paragraph runs longer than 42 words. Sure, investment professionals have more patience than folks opening junk mail. Still, the authors’ 247 words–almost six paragraphs of words according to direct marketers’ standards–is way too long.
3. Don’t save the good stuff for your conclusion. If you’re like me, you learned in school that you should build your argument logically to a conclusion. Throw that habit away, if you want people to read what you write. At a minimum, hint at your conclusion in the introduction to your article.

My rewrite of the article’s introduction

Everybody wants to know when housing will recover. But you can’t make a meaningful estimate until you understand the data. It seems to us that the severity of the decline has been overstated because of problems with the S&P/Case–Shiller Home Price indices. Once we understand the data better, we can make a case for housing getting on the road to recovery by the second quarter of 2010.

The indices are dominated by states, such as California and Nevada, that have experienced a housing boom followed by a bust. In fact, price increases and declines vary greatly by state. The price of housing in roughly two-thirds of our 50 states have risen–or fallen by no more than 5%–during the two years since the fourth quarter of 2006.

My rewrite isn’t perfect. Some of the sentences are awfully long. But I feel confident that it’s more engaging than the original. What do you think?

 


What’s a good elevator pitch for this blog?

/in , , , , , /by

Whether you’re marketing your company, job hunting, or just networking, everybody needs an elevator pitch that succinctly conveys how they add value.

Even a blog needs an elevator pitch, says Darren Rowse of ProBlogger in “Write an Elevator Pitch for Your Blog.“

Here’s my elevator pitch for this blog:
The Investment Writing blog helps investment and wealth management professionals to communicate more effectively with their clients and prospects. The blog provides helpful communications tips and timely articles about industry topics.

How did I do with my elevator pitch? Do you have suggestions on how to improve it?

Also, if you’re a blogger, please share your blog’s elevator pitch along with a link to your blog..


 

Top three signs you should hire a freelance financial writer

/in , , , , /by

Investment and wealth managers can deepen their relationships with clients, prospects, and referral sources by writing articles and white papers. Some firms do their writing in-house, while others farm it out.

Here are the top three signs you should hire a freelance financial writer for your articles and white papers.
1. Articles and white papers don’t get written–or take too long to finish–because the experts are too busy.
2. Your publications don’t appeal to readers because they are
     a.  Too focused on features, not benefits
     b.  Poorly written in terms of style, grammar, and punctuation

3. You realize that writing is a poor use of your employees’ investment and wealth management skills.

A savvy freelance financial writer can showcase your executives’ knowledge without eating up their time and energy.


Ways to dream up topics for financial articles

/in , , /by

Sometimes you run out of ideas for your financial writing or blogging. Maybe it’s time to brainstorm using approaches offered by freelance writer Susan Johnston in “50 Ways for Writers to Find Article Ideas.”


I’ve selected several ideas from her list of 50
“3. Think about seasonal topics like holidays or national awareness months.” The April 15 tax deadline is a classic hook for financial articles. But you can branch out. For example, Veteran’s Day could inspire an article about benefits for those in the military service.
“7. Take a local story and figure out how to make it relevant to a national audience.” The Madoff scandal may have affected only high net worth investors, but it has implications for everybody.
“24. Follow a forum to see what people are buzzing about.” For example, AARP’s Online Community or the personal finance and wealth management “Answers” section of LinkedIn.
“34. Fill in the blank: ’10 Secrets of _______,’ ‘8 Places to ____’ or ‘5 Ways to __________.’ ” This reminds me of the MadLibs game, but some candidates include “10 Secrets of Saving for Retirement, “Eight Places to Find a Bargain on Insurance,” and “Five Ways to Save for College.”
“46. Take a myth and turn it on its head.” For example, U.S. Treasuries are a safe investment.

Do you have tricks that you use to come up with fresh ideas? Please share them.


Research study: How financial services firms will make money in the future

/in , /by

The financial services industry can’t continue to make money the way it used to. So the IBM Institute for Business Value tackled the challenge of answering the following questions:
*  Which forces are disrupting the industry? 
*  What will clients be willing to pay for?
*  How will the basis for competition change? 
*  And what steps should financial services firms take to prosper over the next three years?




Recommendations for a “new financial order”


You can read the researchers’ answers in “Toward transparency and sustainability: Building a new financial order.” As I see it, their answers boil down to a need for financial services firms to

1. Work with regulators to develop a system that hits the right balance between protecting investors and fostering financial creativity

2. Deliver on their promises to clients, including their promise “to focus on the interests of their clients”

3. Become more specialized, with a division between “beta transactors” and “alpha seekers”

On #1, the need for the right regulation, the executives surveyed by IBM anticipate “greater transparency and higher capital requirements,”IBM’s analysis suggests seven elements for an appropriate solution (see p. 7).

As for #2 “… firms will need to become more cost-effective, manage risk more competently and move closer to their clients,” says the report (p. 9). 

The specialization called for in #3 may result from unbundling. Although the industry executives surveyed by IBM favor the universal banking model,”the vast majority (89 percent) anticipate that overcapacity will ultimately result in some sort of unbundling” (p. 12).





Provocative ideas

“Most providers do not even realize what their clients actually want,” says the report. So they’ll struggle to meet their clients’ needs.

Managing risk will require cutting costs because “the amount of risk [financial institutions] can underwrite relative to the capital they employ will be much lower…. Slashing headcount and closing business lines–the levers traditionally employed when the industry wants to save money–will not be enough” (p. 9). Companies must slash 20% beyond the savings they realize from divestitures and eliminating redundancies, according to IBM’s analysis. It sounds as if firms have a lot more cutting to do.


Ignore this advice–at least some of it

/in , , , , , /by

“10 Words to Use in Your Website Copywriting” gives you some great advice. But some of author Eric Brantner’s suggestions need to be adjusted for investment management websites.

Eric lists 10 words that tug powerfully on human emotions. 
     You
     Free
     Guaranteed
     Easy
     New
     Proven
     Results
     Save
     Maximize
     Benefit

     
Can you guess which word I’d ban from your vocabulary? 


Yes, it’s “guaranteed.” Bandying about “guaranteed” can get you in trouble with the SEC.


I have my doubts about “new” when it comes to something as sensitive as your prospective client’s money. I think they may prefer “proven.”


As for “free,” it may seem tacky to offer something free on an investment management website. Sure, you can offer a free report, but don’t hype it like one of those late night TV commercials for a super duper chopping gadget.


“You” is my favorite word on Eric’s list. But I know some firms consider it undignified. They prefer to talk about “clients” or “investors.” What’s your preference?