Jonathan interviewed by the Financial Times about investor behavior

May 30, 2017 3:01:00 PM / by Fusion Family Wealth


By Murray Coleman

Investment advice is becoming a highly commoditized marketplace. But recent industry research offers wealth managers a clear path to separating themselves from the pack — that is, focus on coaxing better behavior out.

“Behavioral coaching is almost a lost art — too many advisors see it as crossing a line between acting like an amateur psychologist and serving as a trusted financial pro,” says Lee Munson, chief investment officer at Portfolio Wealth Advisors in Albuquerque, N.M., which manages $250 million.

The latest study of how much behavioral traits impact long-term investment performance suggests that such critics might be severely limiting their clients’ wealth-building potential.

An advisor who works to keep behavioral foibles at bay, applies a disciplined strategy to portfolio management and considers asset allocation as part of a comprehensive financial plan can boost client returns by as much as 4% a year, according to a report by Russell Investments. The study looks at investment flow data from 1987 through 2016, comparing returns to a buy and hold strategy using a total stock market benchmark.

The result is a sort of “behavioral cost” profile where investors tend to move large amounts of their money out of stocks at just the wrong time.

“The biggest threat to a strategic investment plan is likely to be less about a portfolio’s potential long-term gains and more about someone’s emotional responses to short-term market fluctuations,” says Brad Jung, a managing director in U.S. private-client services for Russell Investments and author of the report.

Client returns can be greatly enhanced, he asserts, by advisors who stay in tune with the latest behavioral management research and avoid any sense of “apathy” about “sharpening” their coaching skills.

Eliminating “poor” investment behavior alone can improve returns over time by around 2%, estimates Jung. Another 0.75% improvement in annual outcomes can be realized, he adds, by FAs melding such coaching strategies into a “holistic” approach to financial planning. An earlier Vanguard study found much the same.

“You don’t have to be trained as a psychologist to become a good coach,” says advisor Munson, who considers himself a student of behavioral finance. “You just need a real desire to find out what people truly want to do with their money and how they see it affecting their lives.”

Jonathan Blau, chief executive at Fusion Family Wealth in Woodbury, N.Y., agrees that advisors need to keep working on improving their coaching skills in a rapidly evolving wealth marketplace.

At his indie RIA, which manages $620 million, he and his fellow advisors steer investment conversations toward uncovering certain “biases” people might hold about handling their wealth.

“You can’t just come out and tell people that what they’re thinking about doing is crazy — you’ve got to work to get them to understand how their behavior is counterproductive,” says Blau.

So he focuses on asking questions directed at detecting several “emotional” biases ingrained deep in clients’ personalities and family histories. For one, Blau keeps in mind that academics often caution that investors generally feel the pain of a financial loss much more strongly than any investment gain.

For example, he says it’s not unusual for new clients who’ve suffered recent portfolio losses to resist his initial recommendations. Even if their holdings’ long-term value has risen, Blau frequently uncovers a sense of something behavioral scientists refer to as “regret aversion.”

This makes investors prefer to “wait until the market brings their portfolios closer to their original values,” says Blau. “If you try to force their hands too quickly, they’ll really drag their feet about doing anything.”

Michael Liersch, head of behavioral finance and goals-based consulting at Merrill Lynch, warns advisors to avoid trying to reform clients based on their “negative” biases. “Look at intent— what they plan to do with their money,” he says.

Along those lines, Liersch tells advisors to ask “deliberate” and “descriptive” questions. Those include: “What’s your intent for using your money?” and “How much capacity do you have to take a certain amount of risk?”

In the end, Liersch says that helping families to “fully articulate all of their goals” and then helping them to “assign a priority level to each” can prove to be “powerful” behavioral coaching tools for advisors. “Working from this base of knowledge about human interactions,” he adds, “can only increase the level of trust and relationship-building experience for all those involved.”

Daniel Solin, an independent consultant in Bonita Springs, Fla., is a skeptic. “A lot of behavioral specialists are overstating the need for behavioral coaching,” he says.

But Solin isn’t suggesting such coaching has entirely lost its value in today’s market, where passive investing and robo advice are driving down fees. “There still is real value in advisors focusing on education as a normal part of the onboarding process with new clients,” Solin says.

But any notion that behavioral coaching is a “complicated” task that “adds 2% or more” to client returns is “ridiculous,” he adds. “Advisors should be preparing clients not to panic at the first sign of market risk as a regular part of their responsibilities,” says Solin. “This just isn’t rocket science.”

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