As all advisors know, it's one thing to provide clients with appropriate advice and another thing to actually get them to follow that advice. That's especially the case when clients experience short-term market fluctuations, have troubling conversations with their peers, engage in too much CNBC watching or fall prey to intrafamily disputes over money.
In this series of reports, Investment Advisor columnist and psychotherapist Olivia Mellan and financial behavior specialist Kol Birke of Commonwealth Financial Network address some common scenarios that advisors face in getting their clients to follow through on their advice. This advice for advisors flowed out of a web seminar hosted by Investment Advisor and ThinkAdvisor editor Jamie Green late last year.
Scenario 1: The Panicky Investor
Jamie Green: Your client, a high-powered corporate executive, has been shaken first by the sharp decline in her portfolio's value during the recession, and now by the continuing squabbles in Washington. She orders you to liquidate her equity and bond holdings and go to all cash. She's highly paid, but not so high that she can afford to be out of the market. How do you respond?
Olivia Mellan: I would speculate that this client is in that "deer in the headlights" state where she cannot make any rational decisions. Daniel Goldman calls it "amygdala hijack." When people are in this stressed-out, panicked state, they really cannot hear and they cannot take sensible action.
The first thing is to listen to her fears and empathize with her. Feeling heard will lighten the emotional charge so she can listen to what wisdom and rational suggestions you might be able to provide. You can also teach her that when people are in a high-stress mode, decision-making comes from their primitive survival place, which is always dysfunctional. It's a very bad time and a bad way to make important decisions.
Kol Birke: I strongly support what Olivia suggests about having these deeper conversations. They're like compound interest: the earlier you have them, the more they pay off down the road.
Using a bucket-based approach to retirement planning gives you a way to reframe the conversation. Your client is already holding some percent in cash—it could be 2%, 6%, whatever you've allocated. Given that she's highly paid, that might be 18 months worth of living expenses. By breaking this out visually, showing the client that they've got an amount set aside in cash, oftentimes that can assuage their need to go completely into cash.
If that doesn't take care of it, remember that you're not actually looking for action; you're looking for inaction. The client is already invested as they should be. In a momentary panic, they're about to take an action that would be against their best interest. So it may seem a little devilish, but you might try flooding them with too many options. What I mean by that is to take out your calculator or your financial planning program and show them a handful of different scenarios. Talk about what they like and don't like about each one. At the end, ask them, "Well, at this point we've talked about a variety of things. What options do you think make most sense, and why?" If you flood a client with options in this way, they may actually take no action at all, protecting them from their potentially damaging instinct to go to cash.
