Individual investors are human beings, not robots.
As such, not all investment decisions are based solely on rational models or algorithms. In many cases a person’s emotions or life experience can play the biggest role in a person’s investment preferences.
Chris White is a financial advice expert who has invested the money of hundreds of individuals, families, and institutions over the course of his 25 years in the wealth management business.
Throughout his career, White has paid close attention to the way in which human nature influences the way people want to investment their money. And he has spent much of that career advising his fellow financial advisers to follow suit.
White wrote “Working with the Emotional Investor: Financial Psychology for Wealth Managers,” in which he argues that understanding a client’s emotions is key to pursuing the best investment strategies.
In a wide-ranging interview with Markets Insider, White explained his investment philosophy, the three different client types a financial adviser can have, and the biggest mistake a financial adviser can make.
Markets Insider: How do people’s emotions and life experiences shape their feelings about investments and risk-taking?
Chris White: In working with clients, I’ve found that people’s views about money and investing often can be traced back to early life experiences of pain and loss associated with family, friends, relationships, and love. These experiences can include: the ‘imperfect love” a child received from their parents; childhood events that featured danger, threat or loss; the influence of key authority figures in a young childhood life; family values and culture, and much more. These formative life experiences all shape the growth and development of an individual’s “emotional template” which governs how they relate to the world around them.
As adults, the unique emotional elements embedded in a person’s make-up continue to influence their relationship to the world around them; specifically, an individual’s risk tolerance, their feelings about gain and loss, their capacity to trust others, and their ability or inability to act in their own financial interest, especially in high-stakes circumstances such as economic uncertainty, significant life transitions, or a roiling stock market.
For example, a person who experiences significant personal or emotional loss or pain as a child may, as an adult, have little trust in others, have a deep-seated need for security and control, and be very risk-intolerant when it comes to investing.
MI: How can investors protect themselves from emotional reactions in decision-making or trading scenarios?
White: As investors, it’s important for each of us to know the emotional triggers that can affect us when it comes to investing. Such self-awareness can keep us from making rash choices in some cases — for example, dumping all of our stock when the market is turbulent and tanking.
But developing awareness of our preferred investment “style” is also of value, even when we’re operating under normal, everyday market conditions. For example, in the normal course of things, do you tend to be a cautious, risk-averse investor or more of a high-risk “high roller” willing to take chances to see your wealth grow?
Regardless of your style (and no style is any better than any other) be sure to share your wealth management goals and priorities with your advisor. If there are specific personal values that influence your thinking about investing, share those too. Work with your advisor to develop wealth management plans and goals that are uniquely suited to your personality, values, financial goals, and risk-tolerance. A good advisor should be a good listener, and be willing to work closely with you to understand your needs, interests, and investment priorities. He or she is also in a unique position to help you make sound, well-grounded investment decisions and avoid the pitfalls of emotional overreactions to rising or falling markets.
MI: You wrote about the three types of client personalities (“Fixers,” “Survivors,” and “Protectors”) that show up in high stakes situations. Can you expand on these?
White: Generally speaking, there are three types of clients you’re likely to meet in your work as a wealth advisor.
They include the FIXER, the SURVIVOR, and the PROTECTOR.
The FIXER is a client who is very results-oriented, and business-like in their interpersonal dealings with you. Under normal, everyday circumstances, Fixers can be charming, charismatic, and stimulating to be around. They often attract other people to them. Many CEOs are Fixers because of their “can do” attitude, and because they’re very focused on getting things done.
But when market conditions deteriorate, watch out! The Fixer client can become controlling and argumentative with you. He or she may become abusive too, lashing out and blaming you for what’s happening in the stock market.
If you find yourself dealing with a Fixer client in high-stakes circumstances, take a deep breath. Stay calm, and respond in a quiet, systematic way to what the Fixer is saying. Address the client’s concerns as specifically as possible, using undeniable facts to support your point of view. Your quiet confidence in such situations will help build trust with the Fixer, and reinforce your professional credibility with your client.
SURVIVORS are quite different from FIXERS. Survivors tend to be idealistic and sometimes naïve or unrealistic in their approach to investing. They can be mission-driven martyrs sometimes willing to sacrifice themselves for the sake of noble causes, including stock picks and investment strategies that no longer work for them! At the very least, their idealism can get in the way of them making sound and financially beneficial personal decisions about investing.
If you’re dealing with a Survivor client when the markets are in free fall, he or she may insist on hanging on to a certain stock, even when you think they should sell it. A Survivor is also likely to greet stock market adversities with a certain grim determination, and to say “I’ll get through this, I know I will.”
While evidence of their general steadiness as investors, such sentiments sometimes cause Survivors to dig in their heels, and to resist logical advice about how to curb stock market losses in down markets.
Indeed, in high-stakes situations, the Survivor client can get stuck and be unable to make good business decisions about their investments. At that moment, you may need to gently nudge them in new directions, offering investment alternatives, and suggesting ways they can minimise their market exposure in a bear market.
Lastly there are PROTECTORS
. Protector clients are those who think about others — family, friends, and loved ones — when talking with you about investments and financial planning. If you have a Protector as a client you’ll know it.
Protectors tend to assume guardian and caretaker roles as investors. Under normal, everyday (low stakes) circumstances, Protectors will talk expansively about how they want to use their wealth to benefit others including spouses, partners, children, and loved ones. Or, to benefit specific missions or causes.
Despite their generosity toward others however, Protectors are the most risk-averse of all the client personality types. As situations become high stakes, Protectors tend to display vulnerability. And in worst-case situations, Protectors can become victims of what they perceive to be happening around them.
In contrast to Fixers and Survivors, Protectors don’t believe they have any power to control events or to take action to address deteriorating market conditions.
For that reason, if you work with a Protector client under high-stakes or high-stress circumstances it will be important to calm their fears, help them take charge of their situation, explore options, and plot courses of action to help them ride out circumstances of extreme market volatility.
FIXERS, SURVIVORS, and PROTECTORS are the three predominant client personality types you’re likely to encounter in your work as a wealth advisor. Being prepared to deal effectively with each personality type will ensure you’re able to forge and sustain long-term working relationships with many kinds of people, under many kinds of circumstances.
As a wealth advisor, assessing the specific type of client you’re working with is key to being optimally effective with that client. Different strategies are often required in dealing with different types of client personalities
The biggest mistake that advisors make is to treat everybody the same…
MI: What are the biggest mistakes wealth advisors make in working with clients?
White: The biggest mistake that advisors can make is to treat everybody the same, to presume that everybody has the same goals and priorities when it comes to investing. A second mistake is to push specific financial products or solutions on clients that may not be appropriate for them and their circumstances.
The common denominator here is that the advisor needs to listen carefully to what the client says and needs.
As a wealth advisor, I believe it’s critical to understand what drives my clients’ views and priorities about investing so I can counsel them appropriately about how to manage their wealth and make investment choices. For that reason, I like to begin my work with clients by delving into their personal stories and family histories, in order to understand what has shaped their investment thinking as adults. I look not only to identify the emotional drivers of their decision-making, but also the personal and family values that influence them when it comes to making investment decisions. For example, what do they see as the purpose of their wealth? To what goals (financial, personal, familial, etc.) do they want to commit themselves? In many cases, I find that investors have never been asked such questions as part of the investment planning process. But for me, understanding this “back story” is key to advising my clients in a professional and ethical way.
MI: What are the biggest mistakes investors make?
White: Letting their emotions get the better of them! Earlier, I mentioned that investors typically can be divided into three personality types: Fixers, Survivors, and Protectors. Each has their potential strengths as an investor. The Fixer is very goal and results-oriented, the Survivor is typically motivated by a personal cause or mission, while the Protector is typically very concerned about taking care of others. But under high-stakes circumstances, each client type can go to “the dark side.” In a turbulent market, for example, the Fixer can become intransigent, unwilling to listen to an advisor’s advice. The Survivor may hang on far too long to a bad investment, and resist taking steps to mitigate their losses, while the Protector can become immobilized, and feel there’s nothing he or she can do to take charge of their situation in a bad market.
In situations like these, the client needs to practice emotional mindfulness, and trust the insights, perspective, and recommendations of their advisor. Hopefully, the client and advisor have forged a strong bond of trust under normal, everyday circumstances, which can then help both parties work closely together to keep things steady when the markets are roiling.
MI: Why is it important for advisors and investors to understand their emotional tendencies? Once identified, how can they eliminate their biases to make clearer decisions?
White: I’ve talked about why it’s important for our clients to understand themselves as emotional beings, and to appreciate the emotional triggers that influence their thinking about money and investing.
Likewise, we, as advisors, need to understand our emotions around money and investing as well, if we are to effectively and dispassionately serve the needs of our clients. Why’s that?
Because there will be times when we need to hold our own opinions and feelings in check, when working with clients whose personality types and investment styles are very different from our own. For example, say you are a Fixer, and you determine that your client is a Protector. Your strategy in dealing with that client needs to be very different from what you would use in working with another Fixer, like yourself. Likewise, if you, as an advisor, identify as a Protector or Survivor, you need to adopt a very different stance and strategy in working with a client who is a Fixer.
In Working with the Emotional Investor I spend a great deal of time discussing the nuanced strategies an advisor can employ in dealing with different client personality types.
Understanding the complex emotional dynamics at play in a client-relationship is absolutely essential to the wealth advisor being an effective advisor to many different kinds of clients.
When both you and your client are aware of how emotions shape your attitudes about investing, it creates the conditions for mutual trust to be established, and for you, as a wealth advisor, to bring a dispassionate, fact-based, professional approach to counseling the client sitting in front of you at that moment.
MI: What should an advisor do when clients “go to the dark side?”
White: There are different strategies and tactics an advisor can use to counsel a client under high-stress or high-stakes circumstances. Fixers, for example, are always looking for evidence of your professional credibility. So, under high-stakes circumstances, it’s extremely important for you to stay calm and grounded, even if the Fixer lashes out at you, which he or she may do if they feel financially vulnerable and exposed. Step back and observe how they are “showing up” to you at that moment, then, strive to insert undeniable logic and reason into whatever advice or recommendations you make to that individual to help them make investment decisions.
In contrast to Fixers, Survivors often get “stuck” in times of crisis or market turbulence. They get wedded to investment positions, and may resist selling a stock, even when you recommend they do so to reduce their down market exposure. Survivors often like to “tough things out” even when reasonable options to improve their marketplace position are available. If you see this occurring, you may need to confront the Survivor client and inform them that they are not safe-guarding their assets as they should.
Finally, Protectors are very anxious about the preservation of their wealth. So, advisors must be sensitive to this and reassure them, even in high-stakes situations. Protectors are highly risk-averse; thus, they can be a special challenge for advisors to deal with one-on-one. Because they are very sensitive to market volatility, they often resist embracing reasonable, moderate-risk options to grow a portfolio. Given this, reassure the Protector client that you have completed due diligence efforts to ensure that the investment options and plans you are proposing to them are reasonable and well-researched.
Understanding the emotional make-up of your client is always important, but it’s especially important in high-stakes circumstances. In Working with the Emotional Investor I provide a checklist of tips and tactics you can use with each personality type both in high-stakes and low-stakes situations. I also introduce a powerful conversational model, called the Four Player model that you can use to interact effectively with clients under many different circumstances.
MI: What are some of the triggers that can prompt the personalities of clients to change, and how can advisors adapt accordingly?
White: There are many potential triggers that can cause changes in client behaviour. Wild changes in the market (up or down) can cause client personality types to become more pronounced. During the 2008-2009 market downturn, I had one wealthy, elderly client, who’d lived through the Depression, ask me if he’d have to “start eating spam again.” Other triggers of stress include the death of a partner or spouse, toxic family dynamics, retirement, or other significant job changes, terminal disease, or other profound changes in a person’s life circumstances.
MI: Is there anything else you would like to add about advisor behaviour?
I strive to bring a servant leadership approach to my client work. It is, after all, about them. I’m there to serve their personal, family and financial interests, not my own. I devoted an entire chapter of my book just to the topic of servant leadership. You can only exercise servant leadership with your clients when you understand and appreciate them as individuals, and develop investment plans that align with their unique personality, temperament, values, and financial objectives. or me, this is at the heart of my fiduciary responsibility to those I serve.
Tina Wadhwa contributed reporting.