Studying Behavior and Building Trust

How does an advisor add value? What makes an individual investor turn to their financial planning professional for guidance? What leads a client to act on that guidance? Ask an experienced advisor, and they will tell you that the ultimate answer to all of these questions boils down to just one word: trust.

It’s no secret that trust is at the core of the financial services industry. Clients need to trust their advisor is acting in their best interest, offering sound advice, and is there even in the most tumultuous of times, helping to navigate through cataclysm as steadfastly as the calm.

But it hasn’t always been this way. While trust has forever been a component, historically, the expectation and often most revered benchmark was an advisor’s ability to deliver the highest performance, building their reputation on edging out an extra half  percentage point in total returns. The returns, it was thought, spoke for themselves, but it was a pursuit that would too often backfire as advisors were steered into chasing overvalued securities. As a result of this and other factors, Wealth Management Certified Professional® (WMCP®) Program Director Michael Finke, PhD, CFP®, says that financial advice’s standards have evolved in recent years, and education has been changing with it.

Since joining The College in 2016, Finke has led the effort to reinforce the WMCP® program with the latest in industry thought leadership, as advisors across the industry are moving toward a more holistic approach to serving their clientele. He says the public is starting to understand that a relationship with a financial planning professional is not just about picking a lineup of stocks and bonds. Especially with the rise of investment vehicles like target-date funds, Finke says advisors are competing in an environment where they are expected to do more than deliver marginally higher returns.

This new mindset has led to a more goals-oriented approach, one where the advisor acts more like a trusted partner than a delegated agent. This mindset requires an  understanding of the entire lifecycle for a client investment journey.

“The traditional way of teaching investments is that you construct an investment portfolio, and then when you have a spending goal, you just grab some money from the investment portfolio to fund that need,” Finke says. “Nowadays, we try to begin with the client’s goals and then develop investment strategies to meet each one of those specific goals. And then we construct the portfolio so that it is most efficient at meeting that goal,” Finke explains .

Oftentimes, that means advisors first need to build a fundamental understanding of a client’s aspirations and their reservations. For example, the urge to pull investments in a down market can be an elusive and enduring impulse among investors, one that advisors must work to overcome with their knowledge of behavioral finance. Educating WMCP® students to do just that has become a central tenet of the program.

“When we were developing the WMCP®, we knew that behavioral finance touches every single topic in the program. So when we're developing an investment strategy, if you introduce the behavioral finance aspects, that'll help the advisor do a better job of constructing a portfolio their client can live with,” Finke says.

As with all things, there’s a healthy dose of human psychology at play, particularly when the market is not working in an investor’s favor.

“Behavioral finance is all about recognizing the way the human brain responds to a stimulus, and often in investments, the stimulus that we care the most about is loss,” Finke explains. “We can educate advisors to help people cope with the inevitable short-term losses they will  experience in their investments.”

That approach is part of a long-coming paradigm shift across the financial services industry, one that has taken root across The College’s programs, but is particularly evident for those training for the WMCP® designation.

“By helping contextualize loss in the context of a long-term investment strategy, you create a deeper engagement, a mutual understanding, and a more trusting relationship between the client and their advisor, because they understand each other better,” Finke notes.

At the end of the day, it’s all about the trust advisors have in the education they receive from The College and, in turn, the trust they build with their clients. Their customer base comes to understand that their goals are their advisor’s goals.

“When you think about building a goal-based investment process and starting with a client's goals, it requires you to understand the client more deeply,” Finke says. “It also requires that the client reflect on what's important to them in the long run, and having those types of deeper conversations helps establish a stronger bond between the advisor and the client.

It's a different orientation than what some advisors entering the program have grown used to throughout their careers. The learning experience covers not just how to talk to clients, but also fosters an understanding of where they and their families may be coming from. The goal is to introduce their clients to a new way of thinking about how to save and plan for retirement.

“It’s not just about teaching advisors what questions to ask. It’s about helping them to recognize a client’s goals and then building a plan that will put them on track to achieve those goals, all while keeping in mind their client’s unique circumstances,” Finke says. “We have also introduced case studies to help advisors become more comfortable with some of these more complex planning situations that they're likely to face in their career. It's really all about educating them to provide the professional service that clients aren't looking for.”

The College’s alumni are already on the vanguard of this evolving school of thought through applied knowledge across designation programs. Joshua Gonzalez, CFP®, ChFC®, CLU®, says The College’s focus on financial plan building, investment advice, estate planning, beneficiary concerns, death benefits, and other features of life insurance policies allows him to speak confidently to many different people.

“My usual clients are 40 to 60 years old, high-paid professionals or small to medium business owners with kids at home, who want to pay off their house, pay for college, or get out of working for a living. Others may need to handle complex life insurance needs and business concerns,” he says. “The College’s training lets me holistically tie all these things together and help people in almost every major financial consideration of their life.”

In his experience, Gonzalez says understanding the behavioral finance underpinnings of his client’s behavior helps him be a more effective advisor, adding, “Some days I feel like a psychologist as well, because if you’re doing your job right, you’ve become a friend and confidant to clients rather than just a tool.”

Finke’s studies on the convergence of behavioral science and financial well-being extend past investors’ earning years. As defined-benefit pensions have disappeared for most workers, some of his most recent research suggests that the long-running shift changes spending habits in retirement.

“In the defined-contribution age, many retirees get to retirement and have this big lump sum of money in their 401(k). They roll it over into an IRA, but they don't feel comfortable spending it. They don't feel comfortable seeing that number get smaller,” Finke says. “But of course, that's irrational, because that's why they saved it in the first place, especially in a low interest rate environment.”

Cash flow, he says, can be more comforting than a lump sum, leading retirees to live more freely without as much anxiety about outliving their savings.

“If you have your wealth in some form of pension income or annuitized income, then you're more likely to spend it and live better than if you simply have investments alone, and that's the kind of behavioral science that we help advisors understand for when they are creating a retirement strategy for a client,” Finke says. “How much of their money should be in investable assets? How much of their money should be annuitized for meeting lifestyle goals? Because, it may make sense to actually annuitize a portion of their savings.”

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