How many times have you asked yourself, 'Why doesn't this client follow my advice?' Maybe it happens after you've designed a great portfolio, one that's well-suited to the client's needs. Maybe it's when a client ditches a long-term plan designed to weather rough markets and instead pulls out in a panic.
You might have blamed yourself and tried to find ways to be more persuasive. You might have been tempted to doubt your clients' sincerity (or worse, their intelligence).
The truth may be quite different. Clients often don't follow good recommendations for reasons that have almost nothing to do with your persuasiveness or their intelligence. Instead, it's because we're all wired — investors, advisors, everybody — to do seemingly irrational things, especially with money.
Behavioral scientists have been studying these quirks of the mind for decades and have identified three main barriers that can lead clients astray. To summarize, clients need to:
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Believe what you're saying
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Choose what to do
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Actually do it
Each of these steps presents unique challenges.
Let's say you have a client who has asked for your advice and pays good money for it. Let's also assume you've done your homework, and you have a solid, well-thought-through recommendation. To keep things simple, we'll use this example: You've constructed a well-balanced portfolio, but the client really wants to invest heavily in muni bonds instead. Why might clients like this one not follow your advice?
Barrier 1: Clients don't believe what you're saying.
Sadly, having the right answer doesn't mean it will be believed. To use the example above: Your client has a strong predilection for an unbalanced, narrow portfolio. You counsel against it, but the client just isn't with you.
There are many reasons someone wouldn't believe another person, of course, so let's dispense with the obvious ones that don't apply here: lack of trust in you personally, lack of trust in your data sources or solid data that factually disproves your recommendation. Clients wouldn't be (or stay) your clients if these were a problem.
Again, we're assuming that the recommendation is right for the client — based on their preferences and needs, and the realities of the market (if the recommendation isn't right, no amount of polish will help).
So what goes wrong? You know what's going on in your head, but do you know what's happening in theirs? Here are some tips:
'Easy to think about' equals 'true.' Things that come to mind easily, like vivid anecdotes ("my brother-in-law swears by muni bonds"), often feel more real and true to people, regardless of the evidence behind them.
Supporting evidence finds them. If an investor believes in a particular asset class, they will find information that supports that belief. That happens even if they are not looking for supporting information because their minds will naturally notice the information that supports their beliefs. So they sincerely have more supporting evidence than you do for their perspective.
The dangers aren't relevant for them. As investors, we believe that we'll do better than others — we're optimistic about our chances and about our own abilities. There's evidence that overconfidence increases with the complexity of the task (and yes, gender may play a role as well: Men may be more prone to this than women).
So when you try to dissuade your client of their chosen strategy and offer a surer path less fraught with danger, "Well, those dangers just don't apply to me."
In the behavioral research community, we call these the availability bias, confirmation bias and overconfidence bias. The good news is that we have potential solutions for each.
Not surprisingly, simply telling people that they are overconfident or living in a self-confirming bubble doesn't get you very far. However, in a Finnish experiment, Markku Kaustia and Milla Perttula (see sidebar, "To Dig Deeper," for more behavioral science resources) found that by sharing examples of how investors can fall prey to these biases, they could be counteracted (i.e., not blaming people, but describing how these challenges affect us all).
It's also worth pointing out that in this experiment, the investors were actually professional investment advisors. Remember, the challenges of overconfidence (and confirmation bias) are universal.
Another technique that researchers in a 2009 study found can help is to ask people to imagine the opposite of what they believe and then try to explain why that position is true. In our hypothetical case above, investors would be asked to argue why muni bonds are a bad investment rather than a good one. It gives investors a vivid, easily accessible argument to counter their existing one, and gets them thinking consciously about both sides.
