Your client refuses to diversify the stocks in her portfolio. Instead, she wants her investments heavily weighted in mining firms because her sister owns a jewelry store.
But you know it’s not the right time because those stocks have been underperforming. When you show her the facts, she still insists.
Why isn’t she heeding your advice? Likely, it’s because we’re not analytical beings by nature, says Donald MacGregor, president and senior scientist at MacGregor Bates in Oregon.
When faced with something complex, his research shows we don’t seek rational information and weigh the pros and cons. Instead, we tap into what we feel and apply it to new situations.
“If I think [technology is] stimulating and innovative, then it’s likely I’ll think companies associated with that kind of activity will do well,” explains MacGregor.
Get clients to invest objectively
It’s easy to let emotions get in the way when dealing with unfamiliar subjects. For this reason, MacGregor says, advisors should be wary about presenting new clients with too much information up front. They may feel overwhelmed.
Instead, he suggests starting every visit with an assessment of the client’s mood and circumstances. Ask simple questions about life events, health and happiness (see “What to discuss each visit,” right).
Read: How to captivate clients
“Advisors see most clients once a year,” says MacGregor. “That’s not very often. Ask them how they’re doing. How is work going? How is the family?”
Help connect their lives and investments by reaffirming how their savings are allocated to meet long-term goals. But also teach them to look at their investments objectively.
“If a client suddenly has an interest in green funds and wants to invest in a bunch of start-ups, go back and show her documentation from your initial meetings, which pegged her as a more conservative investor,” says MacGregor. “Clients need to constantly be reminded of the longevity of their investments.”
And advisors must understand clients’ exposures to financial information outside the advisor–client relationship. Ask if she’s reading financial information online or in mainstream media, whether she works with another brokerage, or if she reads her statements regularly.
“Clients may have financial interests or concerns outside of your office—perhaps they’re relying on an art collection as their main asset in retirement,” says MacGregor.
He adds, “You need to understand that, because your job is to advise them on all aspects of their financial lives, not just on the investments they hold with you.”
Brynna Leslie is an Ottawa-based financial writer.