For Financial Advisors

Mastering the 7 Emotional States of Advisors and Investors

Wednesday, May 11th, 2016

We all know that our emotional state impacts our decision making ability in our world as advisors. When the markets are going up, we get greedy. When the markets are going down, we get fearful. And weʼve seen the empirical evidence regarding the disconnect between investment returns which are mostly market driven and investor returns which are behaviorally driven (i.e: buying high and selling low) But there are other more subtle emotions at play throughout market cycles that can influence us more than we think. The question is : how can we master these emotional states to make better decisions and lead clients to better returns and a less stressful life?

The answer is to become aware of the 7 emotional states associated with the market cycles. And by having a better understanding of the link between market cycles and how we feel, we can make better, more objective decisions. Forewarned is forearmed. Then you can develop counter strategies to prevent making mistakes in the heat of those moments. You can be empowered to take advantage of opportunities during those times rather than be a victim of those times. After you go through these, see if you can guess where we are right now in the cycle.

1. Confidence
This is the stage where the fundamentals of the economy appear to be sound enough for there to be optimism in the future. The news flow has its usual focus on some negatives, but there are enough positives in the data and boardrooms that we see hiring. We see new initiatives, new ventures being launched. There is usually a hot new thing that gets everyoneʼs attention. There is faith in the future, a willingness to take some risk. There is actually a nice balance during this phase between the demands and expectations of investors and the reasonable recommendations of financial advisors. Everything is sunshine on the meadow at this stage – everyone is expecting good things. If as an advisor you were to measure your influence over clients on a scale of 1 to 10 with 1 being the lowest and 10 the highest, you are probably a solid 7 at this point.

2. Greed
Now lets fast forward in time – maybe 12 to 24 months out. The bull market is not only in full swing, its enthusiasm has become contagious. The mood of investors is almost giddy. The news flow is so good that investors who missed the boat are feeling really, really stupid. I would argue that it is more psychologically painful to watch a missed opportunity succeed than to watch what you thought was a winner drop. They say that fear of loss is stronger than the desire for gain. But that is incomplete. What makes greed so insidious, if not bridled, is the fact that you desperately donʼt want the ride to end. And if you are one of the few still sitting at the train station, you are feeling not only like you are missing all the fun but something far deeper than that: you are feeling isolated and alone. There is a social dimension to investing that is way under-appreciated. For example, how many of us have an uncanny ability to make major purchases at what prove to be market tops? But this is understandable. Because we are in this industry, we tend to make more money when the markets are going up. Therefore we have more discretionary dollars. And the other thing that happens is we begin to extrapolate recent performance way out into the future (can anybody say mutual fund “mountain chart”). We tend to think that the most logical conclusion is that there is somehow a predictive quality to recent trends. We believe that “the trend is your friend”. And surprise, surprise – we have the most friends when things are up. But now we begin fantasy thinking. During the dot com bubble, did you have any clients that left you because you only made them 30 % and their buddy at the country club made 60% the same year?

3. Denial
In this phase the bubble has burst but very few actually heard it pop the moment it happened. Only through the rearview mirror can we accurately assess the exact timing of when things took a turn for the worst. This is almost always some watershed event or catalyst that becomes identified with the change from one stage to the next. I remember once returning home from a conference speaking engagement at midnight on a Friday night eager to see my family, only to discover my car had a flat tire. Fortunately Iʼm a AAA cardholder and with a simple phone call was able to get on the road again within an hour or so. But when I took the old tire into the shop the next day, the mechanic walked out of the garage carrying a three-inch nail and said, ” This is why you got the flat. You probably hit this several days ago and didnʼt even know it when it happened. Then the leak finally took out enough air for you to notice”. When I think back, there may were some clues like a slight pull to one side. There may have even been a warning light but I was too busy to notice. Its the same at this stage. Because the good times have been going for a while, out first reaction is denial. We see what we chose to see. There is a built in bias that goes something like this: Whatever action we have taken becomes the right one merely as a result of us making that choice.

4. Fear
This is the most powerful four-letter word in the human experience. We know that the fastest way to change a personʼs behavior in the short term is through fear. When it comes to investing, this is the stage where the most mistakes are made by far. There can be a “fight or flight” response hard-wired into our brains from our ancient ancestors that leads to impetuous decision making. This stage is marked by alarming one-day price swings in the markets. And its so important I think it actually has three sub- stages:

  • Shock; As investors move from denial to fear, the initial wave of emotion can best be
    described as “shock”. Its like a death in the family. What is our first reaction? We may
    have been in denial about all the things leading up to this moment, but nothing
    prepares us quite like facing the music. Nothing stings quite like emerging from our
    cave to see whatʼs really happening in our environment. Its the reality sinking in for
    the first time as you finally open your monthly statements and see just how far things
    have gone down. If youʼve been ignoring the news, you start to tune in. The news
    has taken a decided turn for the worst.
  • Panic: Do you have clients that are excellent anecdotal barometers for what is going
    on in the minds of other investors? Are they often excellent contrary indicators?
    When they finally call excited to buy, you want to consider selling. When they finally
    canʼt stand the pain any more and came in to “sell everything” and panic sell, that
    usually marks at least a short term bottom in the market. This phase is often
  • Blame: After panic, there is tremendous internal pressure to rationalize that action or
    that decision. We will go out of our way to prove that what we did was justified under
    the circumstances – even smart, wise, prudent etc. But invariably there needs to be a
    scapegoat for our tale. We need to have a bad guy in our story to make us look like
    more of the hero. And guess who often gets the blame? You guessed it – the advisor.
    This is about pointing fingers and feeling better because if its somebody elseʼs fault
    then by definition its not our fault right?

5. Guilt
As time goes by, after fear has been the predominant emotional driver in our decision-making process, we begin to reflect back on what has happened with some perspective. We start feeling guilty about what transpired, even ashamed in some cases. Its much like being in the heat of an argument and realizing later that maybe the other side had some good points. As the markets start to bottom out, we examine what we did or didnʼt do and the second- guessing begins. Maybe we panicked. Maybe we made a hasty decision. We may feel overwhelmed with grief. “My portfolio died at my own hand”. For example, have you ever had a client sign up for dollar cost averaging into a fund only to bail out when the markets dropped? One situation that stands out in my memory was just prior to the gulf war in 1990. My client was getting more shares as the price dropped but psychologically he couldn’t stand the pain and stopped making contributions right before the shots were fired – and of course we know what happened after that – the market took off. And over the next year, he transferred his account. And it had nothing to do with the quality of advice he got. Had he stuck with the strategy, he would have been in great shape. Aside from the loss of pride, the dominant emotion at play was likely his own guilt for not sticking to the original plan. Have you ever had clients like this where the relationship is just never quite the same? No matter what happens next, the relationship has been contaminated and the only way to cleanse it is to move to another advisor. Would you say there are many clients out there right now feeling this way? Thatʼs why this is such a great time to prospect.

6. Apathy
After dealing with guilt, we see that this whole experience has left not only scars but also exhaustion. One sure sign that we are ready for the next bully market is that people begin to totally lose interest in whatʼs happening in the market. Do you remember thinking that the housing market had to be topping when the reality show “Flip This House” began to air? News fatigue sets in at this stage and we find ourselves becoming interested in other activities. We often look inward and get more grounded. Weʼre now beyond negative media telling us how bad it is – its obvious that there is no value in continuing to beat a dead horse. At this stage, the few sellers left have run out of stock to sell and the few buyers have agreed to pay that clearance price.

7. Doubt
Stocks are supposed to be discounting mechanisms which is why novice investors are so shocked when stocks begin to move well in advance of the actual good news unfolding. Its this kind of doubt – that wall of worry that can cost investors dearly at the beginning of a new bull market. But without doubt, there can be no
opportunity. If by process of elimination we determine that we are in this stage – a real buying opportunity is presenting itself because the fact is that as Sir. John Templeton said years ago: “bear markets are always followed by bull markets”. Are you doubting that we are in a recovery or a bull market? That in and of itself might just be the sign you have been looking for to put money to work in stocks.

So after reviewing these 7 emotional states, how are you feeling? Where do you think we are in the cycle? If you can narrow it down ,you can better anticipate what is likely coming next and better prepare. Warren Buffet says that the key to investment success is to be “greedy when others are fearful and fearful when others are greedy.” But by becoming much more aware of the impact of these other emotions on investor behavior, we can better fine tune our approach with clients to save them from themselves – and sometimes from ourselves.

Tossing Out Financial Advisor Excuse Pillows

Monday, May 9th, 2016

In order to survive turbulent markets, sometimes advisors need to practice “tough love” on themselves and clients alike for the best interest of both. Its so easy to make excuses for not making progress when our environment seems hostile but this is when making decisions and executing effective strategies counts most. When we rationalize our inaction and indecision, its as if we are psychologically preparing ourselves for failure in advance by making “excuse pillows” to soften our fall. And when we face an obstacle its like we have an excuse pillow factory and we call down to the factory floor shouting “all right boys, lets crank up the assembly line, were going to have to make a lot of pillows today”. And just like excuses, these pillows come in all shapes and sizes and materials depending on the circumstances Do you prefer goose down or foam? We can embroider them with colors and patterns that make them more lovable. Would you like that monogramed with your initials or embroidered with your college mascot?

Here are 10 excuse pillows I’ve identified lately coming from advisors of every stripe. See if these look, sound or feel familiar:

1. Its a waste of time to prospect when the markets are so volatile.

While this can be a seductive line of reasoning, the facts don’t support it because markets are often volatile . Think about it: For starters, the folks that are trying to go it alone without an advisor are learning that all the classic investor mistakes get magnified (i.e.: lack of proper diversification, asset allocation, over trading, chasing yield etc…) Then there is the reality of what clients of other advisors are asking themselves right now – namely “should I be getting a second opinion?” Take a moment right now and think about someone you know that has money but you’ve never been able to get a sit down meeting because they’ve told you in the past something like “I’m happy where I am”. Well, guess what? Its likely they are not very happy where they are – so they are far more open and vulnerable to being approached. Rest assured that money will flow to the strongest advisors in volatile markets. And as I remind advisors daily “this is the prospecting opportunity of a life time”. But we have to be willing to reach out to new prospects – especially when its ugly out there.

2. I’m not going to talk with my inactive clients because they really don’t want to talk with me right now anyway.

There are things we can control and things we can’t. And all the research shows that the number one variable in retaining clients is contact. And of course that means that the number one reason our clients leave is lack of contact – not performance or service blunders but good old fashion contact. Keep in mind that e-mail or regular mail is no substitute for face to face interactions and phone conversations. Many advisors spend most of their time talking with their top 20% but its during times like this that the other 80% need to feel the love too. All advisors should have a daily contact goal and stick to it – especially now.

3. Since no investment strategy has worked lately, I’m not comfortable recommending any investment strategy.

In many ways this is a commentary on lost hope and the cumulative damage of  lingering recessions and “rolling” bear markets in different industries. It also flies in the face of history. Anybody remember the famous business week article in the early 80ʻs after the dreaded decade of the 70ʻs? It simply read “The Death of Equities”. I wonder when we might get that kind of headline again? I wonder how many brokers at that time had the courage and vision to look forward and not backward? A more empowering way to view volatile markets is to ask ourselves questions like:

  • Do you still believe in the power of dollar cost averaging into investments over time?
  • Do you believe that bear markets are still followed by bull markets?
  • Do you believe there are businesses that will grow over the next 10 years?
  • Do you believe that there are dividends that will grow over the next 10 years?
  • Do you believe that free market capitalism will prevail and spread throughout the world in the next 10 years?
  • What if we all look back 10 years from now and realize this was the buying opportunity or our life time?

Don’t let the past deny you and your clients all the recovery possibilities of the future. Look forward instead and use rational thinking to keep your long term perspective. The odds are with you. And if there is a crash ahead, you’ll need more than “pillows” to protect you and your clients anyway. Your leadership and belief system are your best “air bag”.

4. I know there are stock, bond and mutual fund positions my clients own that I don’t really follow or manage. But now is not the right time to discuss these with my clients.

I work with veteran advisors that often have 300 – 500 or more different security positions on the books. This is an unruly number to manage much less monitor for even a team of advisors – never mind for a solo practitioner. These advisors have become “collectors” of investments. And these assets can best be described as “orphaned assets”. And in many situations the advisor and client play a game of mutual denial. It goes something like this: “Iʼll agree not to bring it up if you promise not to make me feel bad about buying the investment for the portfolio in the first place”. The problem becomes compounded the worse the investment has performed lending credence to the saying that: “success has many fathers but failure has none”. Excuses here include: “I didn’t recommend it, so its not my responsibility”. Or “I warned the client not to buy it, but they went ahead anyway so they have to “own” that decision.” Regardless of who’s idea it was or whether we have a “fiduciary responsibility” or not, we need to step up to the plate and have that tough conversation with our clients. Here are some questions to ask to help determine whether an investment is an “orphaned asset”:

  • Has the client’s investment objective changed since the investment was made?
  • Have the reasons for buying the investment in the first place changed?
  • Is the investment underperforming relative to its asset class or peers?
  • Does this investment fit in the client’s overall asset allocation?
  • Is the position a “concentrated position” ?

5. Client retirement and financial plan assumptions need to be adjusted but that conversation is just too painful to have right now.

Mutual denial feels better than the alternative of facing the reality. Again, sticking our head in the sand is mutually destructive for advisors and clients alike. Monte Carlo simulated planning tools give us the probability of returns over time but that can give clients little comfort who may need to face the reality of working longer before retiring. “Absolute returns” have become more important to many clients than relative returns. And with interest rates so low and “average equity returns” flat lining” its time to introduce the idea that some tough choices and sacrifices may have to be made. And the possibility of low to mid-single digit returns longer term needs to be discussed. Can we all together bring ourselves to say “austerity measures”? The first step to getting clients to say it is for us to say it first. We can all hope things turn out to be much, much rosier than that , but “hope” is not a strategy. And when you do have those difficult conversations, don’t be surprised when clients actually express gratitude and relief for you having the courage to lead. Like a designated driver with sobering news, just have faith that they will “thank you in the morning”.

6. Watching market news and constantly looking at individual stock quotes is a good use of my time since clients expect me to know what is happening.

One of the most disturbing trends I see is more and more advisors watching CNBC during market hours on big screens in their office – oblivious to the insidious effect this can have on their own ability to add real value to their clients. Ostensibly to “keep up with what is going on” they are really becoming “enablers” and “suppliers” of a drug with side effects that include indecision, doubt and fear. Like “users” sharing needles, we have somehow let clients talk us into the notion that the next “high” will come from the next rush of “news”- we only have to join in the feeding frenzy. And that our real value is knowing the latest micro blip quote in every market or security. Its time we all face up to the fact that television ratings demand drama and hyperbole which are damaging to the psyche of advisors and clients. And when we surrender to this notion we lose our ability to prevent clients from making emotional deleterious, investment decisions.

7. If only my firm would ______, I could do a better job with my clients.

Yes there will always be things you wish your firm had or could do. But if we wait till our firms do what we need to do ourselves anyway, we’re cutting our nose to spite our face. When we find ourselves spending too much time blaming our firms for our lack of whatever, we’ve developed learned helplessness. Top advisors are often ahead of their firms with technology and best practices not the other way around.

8. I would grow my practice if my firm would hire me a better assistant.

For sure, this one comes up a lot. If you haven’t tried this, here is a suggestion: Approach your manager, regional director or other firm decision maker with the following proposition: “I’ll pay for x amount to hire the assistant I want if you will agree to pick up that cost when my production grows by an amount to cover that cost”. If current income levels prohibit making this kind of investment, consider ways to make the best of things for now and look to upgrade later. One question to ask is “how can I improve my relationship with my current assistant?” What is your track record with assistants? I’ve worked with advisors who go through assistants like politicians make and break promises. Have we considered the possibility that we just might be the problem, not the assistant?

If need be, consider partnering with other advisors willing to share the cost. Keep in mind that it may not be as simple as replacing your assistant with another one because of human resource related issues.

One question you should ask is “exactly what role do I need my assistant to play in my practice?” And recognize that all assistants have their strengths and weaknesses like we all do. Its our responsibility to determine the right fit based on the situation.

9. With all the new financial regulation coming, I’m waiting to make needed changes in my business model, product choices or style of business.

Whether new regulations impact mutual funds share classes, annuity product compensation, wrap account structure, fee vs. Commission, broker vs. RIA or other\ issues – there may be changes coming. But don’t let these kinds of changes stop you from moving forward with decisions to improve the quality of your service to your clients. While there may be more red tape, its not likely any of this will prevent you from getting paid for doing what is in the best interest of clients. I know, it may be too much to ask from our favorite institution – Congress – but a little faith here is likely to go a long way. And while this particular pillow has more feathers than others listed here, it qualifies as an excuse none the less.

10. I’d like to hire a business coach to help me but I can’t afford it.

As you might imagine, this is one of my favorites to bring up. But the truth is that this excuse is just like the one you likely hear from some prospective clients : “I want your help and advice, but I just don’t want to pay for it.” Just like there are clients that do fine on their own and people that get in shape without a personal trainer, there are advisors that plod along as “do it yourselfers” – picking up best practices from peers, wholesalers, branch managers and advisor conferences. Nothing wrong with that. But is it possible that this has become an excuse for you not achieving the kind of success you are capable? Here are some questions to help you answer that question:

  • Why aren’t you at the level you want to be already?
  • What would your ROI need to be to justify hiring a business coach?
  • How much is not having a business coach costing you in time, missed opportunities, stress, income level etc…
  • How do you feel about the progress you are making on your own?
  • What if you could accelerate the timing of the achievement of your goals? What is that worth?

On your journey to becoming “The Undaunted Advisor”, I want to encourage you to identify and toss out other excuse pillows that might be holding you back in this challenging environment. Remember, there can be no excuse pillow factory without you turning on the assembly line. And those workers in your mind can be of much better use focused on getting your backside in gear, not protecting it.


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