– Editor's note: This article is the second in a series by CLS Investments CEO Ryan Beach covering his firm's research on advisor-client relationships. Read the first installment here.
As in the medical world, in the financial world we are dealing with individuals, each one unique, each one presenting different scenarios and unique solutions to those scenarios. Medicine and biology are to doctors what finance and psychology are to wealth managers.
Taken as a whole, it may be rather daunting for advisors to consider the endless possibilities they may be presented with when taking a client's financial life into account. However, it is reassuring to know that if we add certain principles of psychology to the equation, we can apply some order to the inherent chaos. We can begin to understand, to get to the root cause of various issues — external and internal forces that together define a person's path forward and cause them to take financial action — sometimes positive, sometimes not.
Scenario 1: The Adult Child
Life is finite. We are afforded a certain amount of time on Earth, and then we die. Perhaps the greatest comfort to us as we contemplate our eventual expiration is that if we're lucky, we will live on by way of the legacy we leave behind — our children. Therefore, is it surprising that we will make irrational decisions regarding money when it comes to family? No. But, if we delve into various scenarios and the motivating factors regarding the financial decision makers, we can perhaps more effectively help our clients navigate these choppy waters when we inevitably enter them.
In two of the scenarios we discussed during focus groups with advisors, a spouse had passed away, leaving the remaining parent alone and in the position of having to assist adult children. Paying off huge credit card bills, or reaching out under the auspices of "doing it for the grandchildren," were just a sampling of the various scenarios at play here. In another scenario, the adult child chose a career path that is very hard to sustain financially: flipping houses. In asking for support, the "child" was putting the client in a tough spot because as a retired postal worker, there was not a lot of retirement breathing room.
The advisor is put into a challenging position here — you must offer good financial counsel, but often that advice runs counter to the emotional pull clients experience toward their offspring. We uncovered many potential motivating factors on the client's side; chief among them was the fear of losing another family member or leaving behind a failed family legacy. Guilt for not getting the child in a position to lead a financially stable life plays a potential factor, as are the need for familial stability and love.
Scenario 2: Incommunicado
Advisors are often faced with the disconcerting experience of clients suddenly cutting off communications. In one case we explored, the 80-year-old client suddenly cashed out a variable annuity and would not return calls or emails. Another bought a terrible index annuity and also subsequently refused to discuss it. One called their advisor to argue about asset allocation, and the advisor was shocked to hear their co-worker chime in mid-discussion supporting a bad decision. In every case, the advisor was left to wonder: Where did I go wrong? How did I not convey my value properly? Could anything have been done differently?
In these scenarios, we identified a two-way street of culpability. First, the advisor needs to evaluate their approach to client relations and communication. In any service business, if you are not speaking to your clients, you should assume someone else will fill that void. When you are effectively selling air, or the intangible, one of the few tangible offerings you have at your disposal is your ability to connect with clients on a personal level. External forces will always be applying pressure to your client relationships. Advisors must also understand that what they do is complex — complexity and the unknown are fear factors. When you have a client who is unclear on what you do, how you do it or why they should value it, you are destined to lose that relationship.
Scenario 3: Black Hole
