Your Financial Advisor Is Human

 
I don't make many guarantees, but I am going to guarantee you one thing with absolute certainty. This guarantee has tremendous impact on the investment advice you receive from an advisor. 

Many financial advisors and investment advisors I have met with seem to believe they are not human. It seems that they believe they are able to make financial decision purely based on rational factors and unaffected by emotion. They are under the impression that they do not fall prey to the same snap reactions when there is a major stock market drop that their clients do. They are wrong.

Financial advisors and investment advisors are human. They experience emotions and react to those emotions just like other humans. Fear and panic cloud rational decision-making for an advisor no differently than for anyone else. These emotions can lead to poor decision and mistakes being made on behalf of clients. You may even have heard your advisor tell you they just had a gut feeling about some investment, either to buy or sell. A gut feeling is not rational, it's emotional. Advisors are also human and therefore prone to make similar errors to other humans.

Your advisor may choose to sell investments at poor times because they watch the markets collapsing. They may become wrapped up in the mania of a strong bull market and buy something as prices are rapidly increasing. They are human and subject to making these same mistakes, particularly if the advisor believes in actively managing your investments.

This emotion is not a bad thing, however. If they were not humans, good financial advisors could not empathize with their clients and could not have genuine interesting and truly care about their clients' well being. You want your advisor to be human, to have emotions and to understand your emotions. It can lead to a deeper and more trusting relationship between you and your advisor.

What is important is that you recognize that your advisor is human and that they can make the same errors you do. Good advisors realize this fact and put in place systems to help prevent them from acting on emotion; they may believe in a passive investment approach which does not react to market movements, they may have a multi-person process to make portfolio changes, or they may employ some other mechanism.

You, as a client, can your advisor recognize their own emotions as well. During the market collapse in the second half of 2008, I worked with a client who would call me almost daily asking if he should make any portfolio changes to some mutual funds we did not manage for him. Each day there was a major market movement (and there were many) he called to discuss, but he clearly had made up his mind before the call. It dawned on me after several calls that he was not really asking for our advice, but was instead gauging our emotions and making sure we were not making drastic changes to his portfolio based on those emotions. He would finish each call by telling me he was happy we were not changing anything and asked that I call him first should we decide to do so. 

You can do the same with your advisor. Call and bring up your fear. Listen to your advisor's response and determine if they are trying to make decisions while under the influence of strong emotions. If you think they are, call them on it. Ask them to write out their rationale for their decisions and the impact those have on your long-term financial well-being in an email and send it to you. This will force them to think more rationally and may impact the decision they are making. You are in this together. The advisor should be trying to help you recognize your emotions and the influence this has on your decision-making, and you need to do so on return. You are both humans.

Now, to tell you my guarantee. I guarantee your advisor is human. No matter what they tell you regarding their ability to work rationally and logically, they are human and subject to the same errors that you might make. They need to understand the importance this has and you need to as well. Advisors cannot and will not be perfect. They will make mistakes. But by working closely with clients in an open and trusting manner, many of these mistakes can be avoided.
 

4 comments:

Russ said...

Nice post, Nathan, and timely too

I agree that while we as advisors often would like our clients to think we're immune to the emotions that are so often associated with making financial decisions, we're not.

And no matter what mechanisms or checks and balances we put in place to prevent ourselves from falling victim to the very emotions we warn our clients against, there is still no way to prevent this completely.

However, the best thing a person and their advisor can do is have a sound, rational decision making process that can withstand the emotional challenges that will surely arise and a strategy or plan that is personalized to the client's most important hopes and dreams for the future.

These elements can serve as a much needed compass when we're all on the verge of losing our way from time to time

Nathaniel G. Gehring, CFP® said...

Thanks for the comment, Russ.

I agree that having a rational decision-making process in place is vital. However, I have watched advisors throw out or tweak their decision-making processes in the throes of emotions. The trick is not only to have that process in place, but also to have the conviction to stick with it even when things are going poorly. Emotion is so powerful, it's easy to create justification for emotionally made decisions. That's why I believe the client and advisor need to be responsible for checking one another's emotions.

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Agata Renfrew said...

That's one thing you can never take away from a person - emotions. I have to agree with you, Nathan. Things might be complicated in the financing world. In the end, advisors still experience ecstasy and breakdown.

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