Understanding clients means helping them feel in control

By Sam Sivarajan | December 20, 2023 | Last updated on December 20, 2023
3 min read
Advisor meeting with client
AdobeStock / CineLens Peopleimages.com

In the world of sales, as in the world of financial advice, understanding your customers is critical. However, this is hard when customers are unsure of what they want.

An interesting example was described in a Harvard Business Review (HBR) article featuring Electrolux, the Swedish appliance maker. Despite extensive market research supporting the decision to offer washing machines for free and apply per-use charges, the move did not yield the expected results when piloted in Sweden.

The HBR article suggests that this approach conflicted with the social identity of middle-class consumers, who did not want to be associated with paying per wash — a practice they associated with lower-income consumers. This illustrates the importance of aligning business models with customers’ social identities.

Similarly, General Mills faced challenges with its Betty Crocker cake mixes in the 1950s. Despite being convenient, the mixes did not sell well because housewives felt guilty using them, as baking from scratch was seen as a way to demonstrate love for their families. General Mills realized that they needed to make the mixes seem more authentic. So, they removed the powdered eggs and required consumers to add real eggs when using the mix.  This made the mixes seem more like traditional cakes, requiring “love and attention,” and sales skyrocketed.

These examples underscore a powerful lesson in consumer psychology: people want to feel in control and do things the “right” way. When this sense of control is compromised, resistance arises. This insight is relevant not only in consumer behaviour but also in the realm of investments and financial advice.

When advisors conduct risk assessments, investors often claim they understand market risks and will be able to ride out periodic downturns, but then they panic and want to sell when the market tanks. This plays out often as a combination of investors feeling out of control but also not fully understanding their own attitudes to risk until it moves from theory to reality. This complexity of human behaviour underscores the need for deeper discovery in understanding clients’ true motivations and needs.

Moreover, investors used to exercising control in their careers or their businesses may struggle with ceding control when seeking financial advice. This means that, much like with the Betty Crocker cake mix, there are benefits when advisors involve their clients in portfolio creation and implementation. This doesn’t mean investors are picking stocks; it does mean they’re actively involved in defining their goals and have some choice between portfolios designed to meet those goals.

Co-creation takes longer but, as we experienced at my old firms, it leads to far less attrition down the road. Recent studies have shown that investor self-confidence — a sense of control, belief in their abilities and a clear plan — is closely correlated to loyalty to their advisor. There are many levels of co-creation, just as there are many types of clients. The the advisor’s questioning and listening skills are needed to find the right level of partnership.

Additionally, advisors must connect with clients on an emotional level, demonstrating understanding, empathy and care for their financial well-being. This also requires deep listening and continued questioning to find the hidden motivators that can trigger clients’ seemingly irrational behaviour. The Electrolux and Betty Crocker examples demonstrate that failing to understand customers’ emotions will lead to market failure.

Technical skills are great, but they speak to the head. First, advisors need to speak to the client’s heart. Betty Crocker only succeeded when it showed that it understood 1950s housewives’ need to show love for their families. Advisors can do that by showing they understand clients’ needs and fears, and that they care about clients’ money as much as they care about their own.

The Electrolux and Betty Crocker examples also highlight the importance of status and social identity when it comes to connecting with customers. A future column will examine how understanding clients’ social identities can be useful for advisors as they help clients achieve their financial objectives.

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Sam Sivarajan

Sam Sivarajan is an independent wealth management consultant and behavioural scientist.