The Psychology of Wealth Management and Building Lasting Client Relationships

Several years ago, a long-time client contacted me, unsettled despite being on a steady path to retirement.?

Though their investments and savings were on track, unnerving headlines and friends’ worries stirred doubts. “I’m not 30 anymore,” they noted, questioning if they could still reach their goals.

Rather than a sales pitch, I responded with a rational review: their current status, our agreed strategy, historical market patterns, and how today’s choice would impact the future.?

My data was sound, but unconvincing. Appreciative yet unmoved, my client proceeded to stockpile cash (at 0% interest rates), reducing investments despite the likely consequences.

This scenario resurfaces often - sound logic alone cannot conquer fear or uncertainty. As advisors, we arm clients with research and projections, hoping knowledge leads to wise decisions. Yet emotional and cognitive biases reliably undermine even the soundest data.

And the other day I connected with my client again. They are still behind on their retirement savings and now want to re-enter the market and make up for the lost value they missed out on.?

This example highlights the power of psychology.?

Economic theory is about humans being rational agents that make decisions to maximize their utility. But, emotions and cognitive biases continuously push us away from the rational towards the irrational.?

This is why, no matter what you do on the performance side or presentation of the data side of the equation, ultimately it will not be enough. Because there will be a point in time where emotions impede on the rational.?

Does this example prove that performance metrics are meaningless? Not at all. But for enduring client relationships, we must become as fluent in behavioral finance (BeFi) as in ROI. Portfolio returns offer fleeting satisfaction, while other values foster lasting bonds.

An investment of focus in BeFi won’t eliminate clients' focus on performance, rather it is about diluting the impact of performance on their perceived value of your work.?

I think about it in the sense of dilution of equity holders. As a business grows, it takes additional capital to accelerate the growth. Thus, equity holders get diluted. And this tends to be ok because I would rather have a small piece of a larger pie, as opposed to a large piece of a small pie.?

If we are solely focusing on performance, then we have one determinant that drives our clients satisfaction. And we all know that performance reverts to the mean (no matter how smart you are). But if we can dilute this focus and value by stacking chips of value in other areas, we can dilute the focus on this one thing and thus dilute the impact that performance will have on perception of our value.?

Morgan Housel elegantly captures people’s tangled relationship with money:

“I think what many people really want from money is the ability to stop thinking about money. To have enough money that they can stop thinking about it and focus on other stuff. It’s this weird relationship: They become obsessed with making money with the hope that someday they can ignore it altogether.

That obsession is fueled by stress and anxiety. It often shows up as career ambition, aggressive investing, and Type-A motivation.

Then, once they become rich, they realize they can’t let go of that stress. It’s become ingrained in their identity.

A lot of financial planners I’ve talked to say one of their biggest challenges is getting clients to spend money in retirement. Even an appropriate, conservative amount of money. Frugality and savings become such a big part of some people’s identity that they can’t ever switch gears.”

True peace remains elusive. Like my client, they felt the decision to cash would resolve their worries. Yet, over the three years they continued to worry, just differently. Worries shifted from “will I lose all my money” to “will I have enough money.” Worrying was ingrained in who they are.?

I’ve been on a continued quest to better understand how to better leverage these lessons in behavioral finance within the day to day of serving clients. My quest led me to relationship psychology - what builds unshakable commitment? As commitment is necessary to help reframe value from something ingrained for our entire lives. There are three key pillars for establishing the necessary committed relationship:

• Satisfaction: How well the relationship meets one’s wants and needs.

• Alternatives: How favorable the current relationship compares against other options.

• Investment: The overall effort invested into the relationship.

Armed with these insights, I took 4 distinct actions to deepen my relationships with clients:?

• I went deeper on our conversations to identify an area of shared interest or experiences with each client. This ultimately became the focal point in every conversation. This created a stronger bond between me and the client. And helped me to better understand their wants and needs based on this common experience / interest.?
• I stacked chips in my favor. Meaning, I built in additional services to offer each of my clients. There was very limited uniqueness in the services when viewed on their own. But the combination of them all together was the driver of uniqueness that they couldn’t get anywhere else.?
• Every action I had a client take, I analyzed. Even the ones I felt were easy. I wanted to make them even easier, to the point the client didn’t feel they did anything, yet received the value.?
• After we put together a holistic plan, our team set up multiple meetings with the client to execute steps of the plan. This created a collaborative feeling and simplified what the client needed to think about or figure out.?

Finally, I have found 4 viewpoints from some successful visionaries to serve as insightful nuggets for how we can implement the understanding of human psychology to better our client relationships and ultimately our value.?

"All human beings work better when they get what psychologists call reinforcement. If you get constant rewards, even if you're Warren Buffett, you'll respond.

Learn from this and find out how to prosper by reinforcing the people who are close to you." (Charles T. Munger, Tao of Charlie Munger)

LESSON: Reinforce your value to clients consistently, both in good and bad times. 5 - 7 touchpoints that are accumulated via newsletters, quarterly updates and annual reviews is not enough. This should be more like 15 - 20 touch points and more directed on what the client wants to know about and how you want them to perceive your value. If all you talk about is markets and returns, that will be how they judge your value.?

"Business schools reward difficult, complex behavior more than simple behavior, but simple behavior is more effective." (Mary Buffett and David Clark, The Tao of Warren Buffett: Warren Buffett's Words of Wisdom)

LESSON: Too often we feel that the more we show, the more we explain, the more pages in the report the more our value will be perceived. We feel that if we condense a client meeting to 5 minutes then we are not earning our fee. The opposite is actually true, the simpler we make it the more value we provide. It’s our cognitive bias of thinking we need to say / show more to deliver more value.?

"Healthy organizations are a mental concept of relationship to which people are drawn by hope, vision, values, and meaning, along with liberty to cooperatively pursue them. Healthy organizations educe behavior. Educed behavior is inherently constructive.

Unhealthy organizations are no less a mental concept of relationship, but one to which people are compelled by accident of birth, necessity, or force. Unhealthy organizations compel behavior. Compelled behavior is inherently destructive." (Dee Hock, One from Many: VISA and the Rise of Chaordic Organization)

LESSON: We can learn from what drives healthy corporations to see what we need to deliver to drive healthy relationships. A more meaningful and deeper value we can provide is helping clients create hope, define and see a vision, align actions to values and create meaning. And once this is defined then spending all our efforts to help provide clients the liberty and opportunity to pursue them.?

"Principles are fundamental truths that serve as the foundations for behavior that gets you what you want out of life. They can be applied again and again in similar situations to help you achieve your goals." (Ray Dalio, Principles: Life and Work)

LESSON: Help clients define their core principles. Then put every decision through the lens of these defined principles. This way, we aren’t telling them the decision to make, they are driving that decision through pre-established principles. It makes it easier to accept the decision, but also creates a sense of ownership in the decision.?

Our moat continues to be us, the people we are. This defines the relationships we attract and the people we serve.?

And most of us in the industry understand this.?

Yet, we spend an unbalanced amount of focus and time on portfolio construction and investment management; which will always be necessary, but not our moat.?

As the industry continues to see the value of investment management become more commoditized, the proportion of time spent in this area should be reduced.?

And, rather, we should put more emphasis and focus on understanding the psychology of humans, our clients and the cognitive biases that drive the irrational decisions they make.?

Thus, having a better ability to apply this knowledge to enhance value that will expand our moat, rather than contract it.