D&S: Getting through analysis paralysis

Advisors sometimes face an uphill battle when it comes to advising clients in turbulent times. The key is a risk manager that can be part advisor and part psychologist.

It’s not uncommon for clients to voice serious doubts about their advisor’s advice, or even completely reject it. “If a lawyer or accountant were to ask a client what should be done, I suspect the client would say, ‘Whatever you think—you’re the professional.’ It’s amazing that in our industry, even to this day, there’s still such a struggle to build up a legitimate professionalism,” says Michael Lynds, senior vice-president of products and services at Macquarie Private Wealth.

Lynds’ observation is largely borne out by this year’s Dollars & Sense survey, which shows often considerable divergence between what advisors thought made good investments over the past three years and what those same advisors thought their clients would say.

Case in point: Survey results show that 53.4% of advisors managing more than $50 million answered “individual stocks” when asked about ideal investments, but only 36.2% of the same group said their clients would make the same judgment.

Andrew Marsh, CEO of Richardson GMP, says being an advisor often means being a psychologist as well. “Even if an advisor is confident and optimistic about the future, when you talk to clients every day, there is a disconnect between what an advisor—who’s trained to have a longer term view—thinks, and what their client thinks. You really feel you have an uphill battle to help clients see the optimism you see.”

Marsh adds that because we’re speaking here of advisors with a book size of more than $50 million, the client base is larger and therefore these advisors are having more conversations with more clients and perhaps understand their mindset better than advisors with smaller books.

Lynds, on the other hand, believes clients of advisors with larger book sizes likely go out and seek more information, have other sources of advice and come to the table with perhaps too many options, challenges and questions. He calls this “analysis paralysis” and says this type of disjointed strategy would lead to the kind of divergence seen in the survey data.

In Lynds’ opinion, a key to lessening the disconnect in cases where there are multiple advisors working on a single portfolio is to have a lead advisor with a single strategy. This will go a long way towards reducing the confusion created in the mind of the client.

Another factor behind the disconnect between advisor and client views is that trust is earned over a long period of time, while confidence can erode very quickly. With that in mind, Lynds says, “advisors must show disciplines that work over time, and then clients would more likely come back into equities.”

The survey results also show a disconnect between advisor and client for asset classes that are considered less risky and perhaps more stable in volatile markets. For example, while 23.6% advisors thought GICs or fixed income investments would have been sound over the past three years, 51.9% of those same advisors thought clients would have thought they made good investments.

The survey also shows that 9.8% of advisors thought money market funds were a good investment, while 23.2% thought their clients would think so.

“None of the statistics really shocked me,” says Marsh. “All reflect the psychology of behaviour.” He stresses that the best advisors are focused on looking forward, and their challenge is to work with clients who are looking backwards at their last statement.

The takeaway from the survey, adds Marsh, is advisors need to help clients have a process that will remain consistent, regardless of market conditions. This ultimately creates deep, lasting relationships with clients.

And as much as Marsh believes clients are emotional beings, he thinks the divergences observed in the survey can be bridged with a well articulated plan. “The best advisors can articulate their discipline for managing risk. What that does is it shows your clients you have a plan, a strategy, and a discipline that removes emotion from decision-making when it comes to managing a portfolio.”

Lynds says the narrower variances observed in the survey for advisors with smaller book values are not particularly surprising. “There is merit [in the idea] that smaller book value clients are more likely to give in to advisor’s advice,” he says.

He notes his own experience and says clients with smaller amounts of wealth are typically more passive and a little less engaged.