The News: A recent study finds creeping compensation costs and low levels of succession planning in the industry, suggesting the demand for top talent is outstripping supply.

Read More »

The News: According to a recent Morgan Stanley report, high-net-worth individuals lost an estimated $8.9 trillion over the three year period from 2007 to 2010, with some losing as much as 20% to 40% of their total wealth.

Read More »

The News: Advisors must help clients achieve long term goals by keeping them on track with their financial plans despite market volatility.

Read More »

Last week brought numerous blows to the investor psyche, including a near U.S. government default, a 500-point market drop and the first-ever downgrade of United States debt by Standard & Poor’s, taking the U.S. from a long-standing triple-A rating to AA+.

With the global economy still reeling from last week’s events, the wealth management industry faces a daunting challenge. Such extreme market volatility will undoubtedly cause high-net-worth clients, still scarred from the last economic crisis, to reconsider what constitutes a safe vehicle for their investments. Wealth management firms once again face clients’ rising risk aversion and growing insecurity about where to put their money.

To calm clients’ fears and combat clients’ emotional responses to recent market and economic unrest, consider the VIP Forum’s four recommendations:

• Proactively reach out to clients and give them confidence you are looking out for their best interest. While a proactive call to check-in provides a nice service touch, firms should use these conversations as an opportunity to engage clients in deeper discussions on their true risk tolerance.

• Conduct market-related role play exercises with advisors to identify where they struggle in communicating effectively with clients about economic and market uncertainty.

• Educate advisors on the basics of behavioral finance to help them understand, identify and overcome clients’ irrational biases and innate emotional responses to market uncertainty.

• Engage clients’ in goal-based planning to reframe advisory conversations around achieving life goals rather than short-term investment returns.

The News: According to a recent poll by Spectrem, investors under the age of 40 are most likely to let emotions guide them on up to 50% of their investment decisions. Additionally, 55% of HNW investors with $5 million and more said they make investment decisions based solely on emotions.

Read More »

The News: A recent Barclays Wealth survey finds that 41% of high-net worth individuals wish they had more self-control when dealing with their finances.

Read More »

We often hear from members that despite improved market conditions advisors still can’t get their clients back in to the market. Clients witness daily market volatility and prefer to stay put in cash or other conservative products rather than risk losing more of their already depreciated portfolios. Behavioral finance economists would attribute this to “Loss Aversion” – the tendency people have to avoid losses, rather than acquire gains. We’ve seen behavioral finance gain steam in the industry over the past year, and agree it deserves a place in the wealth management advisory process. The behavioral finance school of thought suggests that we have innate irrational biases that lead to poor decision-making. And if that’s not bad enough, in times of crisis the reasoning part of our brain actually shuts down, increasing our likelihood to make irrational decisions.

To help advisors guide clients back in the market, John Hancock Funds launches a behavioral finance education program for its advisors. The firm not only educates advisors on common investor biases, but also teaches advisors how to recognize when clients are likely making decisions based on irrational biases, rather than sound reasoning. Once advisors understand the biases, the firm coaches advisors on how to reframe client conversations to overcome the biases. Let’s use the loss aversion bias as an example (defined above).  The firm teaches advisors that if a client says something along the lines of, “We’re up 15%, let’s take some profit now”, they should view that as a warning sign of loss aversion. To reframe the conversation and move past this innate bias, advisors should position the conversation around the long-term, rather than short-term.

John Hancock does not stop at advisor education – the firm also encourages advisors to educate their clients on common investor biases. The firm finds that making clients aware of common investor biases fosters an open dialogue between advisors and clients about how to control innate emotional responses to market volatility.

So if you’re feeling frustrated by clients’ continued conservatism, just remember – their brains are making them do it.

Access the full case study.

No one can argue that the economic crisis resulted in a change of client profiles. We’ve heard it from VIP Forum members. We’ve seen it in data from our proprietary client surveys. Industry experts continue to discuss it. And wealth managers are finally responding.  How? To engage the newly defined post-crisis client, wealth managers are incorporating behavioral finance into the wealth management advisory process.

Read More »