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Protecting Your Clients from Behavioral Investing Mistakes

StratiFi Technologies Inc

The investor’s chief problem – even his worst enemy – is likely to be himself.”
– Benjamin Graham

A key to understanding behavioral finance is understanding that investments do not necessarily cause investors to lose money. Investors often cause themselves to lose money.   Investors who have the discipline to follow sound investment principles, and who can stick with a strategy, are more likely to achieve positive long-term returns. Investors who lack confidence in their strategy, or the discipline to follow it, are more likely to follow their emotions and thus make poor decisions.

Why Clients Need a Financial Advisor

You are probably familiar with the theme. A successful business executive decides to get in shape. He hires a personal trainer to develop an exercise and nutrition plan based on his fitness objectives and guide him through his workouts. They worked out together three times a week. Within a few months, the executive felt confident he could execute the plan on his own, so, to save some money, he let the trainer go.

Not surprisingly, after a few more visits to the gym, the executive stopped going. It seemed something would always come up that prevented him from going, or he would convince himself he would make up for it later. Later never came. As his waistline gradually returned to its original size, he began to understand why people hire personal trainers. It’s not just to provide a plan; it’s to keep us from losing focus and discipline. A personal trainer is paid to hold us accountable as we work towards our fitness goals.

The similarities between sound investing and fitness training are clear. Both require clearly defined objectives, a customized plan and solid execution to succeed. With investing, as with fitness training, it is invariably the clients who breaks from the strategy, which is why they need a financial advisor.

It’s not the Plan; It’s the Client’s Behavior that Matters Most

Most financial advisors would admit that creating an investment plan is the easy part of working with clients, The difficult work involves keeping clients centered on their objectives and strategy when the market turns chaotic. It’s the process of instilling the discipline necessary to ignore the noise and focus on the long-term. At its core, the advisory relationship is about keeping clients from making behavioral mistakes that can lead to disastrous results.

Like the fitness trainer who conditions their clients to avoid the behavioral traps that can slow progress or sabotage a plan, financial advisors must educate their clients for the same purpose. Clients need to understand that, while having a sound investment plan is important, it is their behavior that will have the greater impact on long-term investment performance.

The Real Value of a Financial Advisor

It is important for financial advisors to understand that clients are less likely to break from strategy when they have confidence in their plan. Investment strategies based strictly on clients’ financial goals, using assumptions closely linked to their return and risk parameters, with a long-term horizon, instill more confidence and makes it easier for clients to ignore short-term market fluctuations.

Bottom line: the real value of financial advisors is in their role as a financial coach, educating clients and keeping them focused on what really matters and helping them avoid the common behavioral traps that lead to underperformance.