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The key to a successful relationship with a financial advisor

It’s personal.

The biggest risk to any investor’s money is often their own behaviour. Many studies have shown that, on average, investors receive lower returns than the funds they are invested in because they chop and change instead of sticking to a plan.

“Investors know they should hold diversified portfolios, but many chase past performance and end up buying funds too late or selling too soon,” research house Morningstar noted in a recent study. “As a result they suffer from poor timing and poor planning.”

Mostly this is a result of making emotional decisions or succumbing to personal biases. When the market falls, for instance, investors may panic and sell out at the bottom, locking in their losses. They then sit out until the market is up again, and only buy at the top.

Investors also face behavioural factors such as recency bias, which happens when they start to believe that whatever their investments have done in the most recent past can be extrapolated into the future. Another powerful bias is the herd mentality, which sees investors following trends, even though they may have no rational basis, simply because they don’t want to miss out.

Historically, this behavioural side of investing is not something to which many financial advisors have paid attention. Their primary focus has been on providing products or picking fund managers they believe will deliver the best returns.

Increasingly, however, advisors are recognising that if their role is to help their clients achieve the best investment outcomes, then that must also involve behavioural coaching.

“Poor behaviour and all the biases individuals face can be destructive to investment returns,” says Matthew Radgowski, the global COO of Morningstar Investment Management. “So if advisors can coach them on their behaviour, they can help them eliminate that gap.”

Information overload

A large part of the challenge investors face is that they are constantly exposed to large amounts of information that could influence them. Day-to-day market or share price movements, economic figures and political news can all impact on an investor’s outlook.

“This day-to-day abundance of information buries them,” Radgowski says. “They want action, they feel they need to do something, or they want us to do something. But what we need to do is drive the right behaviours and help them navigate the maze of investing.”

He advocates a few simple techniques that could help investors to stick to their financial plan.

The first is for advisors to ensure that their clients understand and buy into the plan in the first place. To do this, he recommends having the investor explain the plan back to the advisor in their own words.

“Having them verbally commit to the plan is a very powerful technique,” says Radgowski.

Secondly, he suggests getting the client to write a letter to their future self for the time when they want to make a drastic change to their plan because the market turns, or they think they have some great investment idea that all their friends and family are buying into.

“It’s a personal commitment letter that basically says ‘we knew this day would come’,” Radgowski explains. “We knew the market would have a downturn as it always does, or I was going to come with some great new investment thesis, but here’s what we said we would do: I am going to stay the course.”

He says that while this is an extremely simple tool, from a behavioural science perspective it is very effective. Since the client has made this commitment to themselves, they are very unlikely to disregard it.

A new perspective on goals

Radgowski also argues that to create a bond with their clients, advisors need to appreciate what their real goals in life are. This is not just in the sense of required cash flows, but what they want to achieve as people – their psychological needs and self-fulfilment aspirations.

While this builds a better understanding of the individual, it also helps the client to see the future they want for themselves.

“The short term then becomes less important,” Radgowski says. “If clients can visualise where they want to go, then the likelihood of them sticking to their plan is higher.”

Radgowski however acknowledges that doing all of this takes time. There is a significant commitment involved.

This may make some advisors baulk, since they don’t think they can be adequately compensated for the effort. But he argues that advisors need to evaluate where they are really adding value for their clients, and whether they are actually spending the most time on those things.

“Think of the time and effort it takes to do asset allocation, portfolio construction, security selection,” Radgowski says. “Do those add value, or could you outsource them?

“Because the connection you have with the individual in terms of their goals and objectives is more important than any investment track record,” he says. “And that ongoing dialogue is what is really important to success.”

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I have for 21 years heard “find a qualified financial advisor. I have also RESEARCHED how tooo many financial advisors were selling based on commission.Here’s a quote from an old newspaper. “As soon as you sign up for your investment you broker is paid his commission in full. The life company facilitates this by taking a LOAN in YOUR NAME in it’s books and you are charged “interest” at market rates.” In 2012 The F.S.B. stated “about” 41% of financial advisors are NOT QUALIFIED to give you financial advice.Now they are doing away with the FSB and making it better????????????????????Pay off your debt !!!!!

You are absolutely right that some people who call themselves “financial advisers” are not qualified. However, the situation with upfront commission that you describe is only applicable to investments packaged in a life insurance wrapper and not to collective investment schemes (unit trusts). You are also absolutely right that becoming debt free should be a high priority in financial planning. However, of critical importance is crafting a long term financial plan before you even start looking at financial products/solutions. And that is what a properly qualified and ethical financial planner (CFP® at the least) can do for you, preferably at a fee (like any other professional) that is not dependent on you buying any financial product. Do not accept that anyone who calls him/herself a financial planner is worth the term. Ask questions, ask for credentials and qualifications and look for track record.

I think your response is absolutely correct in its content but here’s the conundrum – where do you find the forward looking, ethical and qualified financial planner. I often ask of these “planners” whether they are the planners of their parents and in-laws portfolios, and whether they have made meaningful projections on the wealth of their parents and the milestones to achieve these objectives,and, finally what is their plan for their own wealth creation. Simply put many financial planner are not looking at the wealth creation of the person, but rather what income streams can be garnered from the the plan

Great article, basically describes what a Lifestyle Financial Planner does.

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