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Getting Emotional With Clients

Understanding how clients deal with the prospect of loss can give advisors a leg up.

Correctly managing clients’ emotions can be nearly as important as properly managing their money. 

“All investing is emotional,” says Chris White, a CFA with 25 years of experience and author of Working With The Emotional Investor, “money taps into something deeply rooted in our psyches.” But, he’s quick to identify that there is one particularly element of dealing with money that truly exacerbates these deep-seated anxieties—the prospect of loss.

Understanding your clients’ personalities, and how they react to the prospect of loss, can give an advisor a leg up in keeping things calm financially when the world is going haywire.

According to White, clients live in two worlds: (1) Low Stakes. When things are just chugging along evenly, client emotion is less likely to rear its head; and (2) High Stakes. When life is volatile volatile the dark side of client behavior comes out.

White finds it useful to consider 3 distinct personality types in investors which center on how they destructively react when facing high stakes.

1.     Fixer. These clients are risk seeking and want to win at all costs. If they take a big hit, they’re likely to bet even larger the next time in order to get a quick fix.

2.     Protector. Such clients are constantly anxious that things may go awry, which makes them a danger to look to unload assets at inopportune times.

3.     Survivor. The rare client that is risk indifferent. They are willing to soldier on through the ups and downs, which means that they may be inclined to hold onto things longer than they should.

It’s important to understand that these worlds don’t relate only to financial markets, but any time of stress. A high stakes situation is just as likely to arise from talking politics around the holiday dinner table as it is from market fluctuations. Advisors need to be careful of allowing such emotions to cross over and should be particularly wary of client behavior in times of stress.

“Losing is twice as unpleasant as winning is pleasurable,” White notes.

It can be difficult for advisors to predict exactly which category a client will fall under before a high stakes situation arises—at which point it may be too little too late. Indeed, clients may show signs of all three types of behavior during times of low stakes, which can really muddy the waters. White strongly believes, however, that one category will ultimately become dominant when the chips are down, and its possible for an advisors, through careful listening, to identify (or at least take an educated guess at) which one it will be beforehand.

White stresses that whether advisors like it or not, they are part of an investors “system,” just as much as family or friends, from the moment that the client walks into their office. As such, trying to maintain an aura of professional detachment in every case, though occasionally the correct tact, may actively harm a client in others. Some clients may need a bystander to listen to their problems and let them vent, while others may require more active counseling. Advisors must know their clients well enough to be comfortable taking an adaptive approach—and be willing to engage when necessary.

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