For Advisers, Psychology Matters As Much as Economics

After spending the last 25 years serving as a wealth adviser to clients ranging from individuals to institutions, Chris White, a chartered financial analyst, believes that all sorts of investment decisions are influenced by much more than just market trends and numbers; he’s “seen firsthand that investing is as much an emotional experience as it is an analytical one.”

White explores the concept in his new book, “Working with the Emotional Investor: Financial Psychology for Wealth Managers.” In the book, he explains how peoples’ investment decisions and risk tolerance can be influenced by their upbringing and past experiences—especially traumatic ones that occur early in life.

“Childhood experiences obviously tend to have a large effect on the makeup of individuals,” White tells PLANADVISER. “Up until around the time a child turns eight, the world revolves around that child, he or she is the center of the parents’ attention, and can do no wrong. Then, something happens. Something breaks that, and this child realizes they are no longer the center of the universe. It happens to all of us.”

White says these breaking points can be marked by events such as divorce in the family or the loss of a loved one—or it can be something more nebulous. By drawing from his own experiences and the latest research in the field of neuro science, he says he “learned that these painful memories can be triggered during high-risk situations like the prospect of saving for retirement. Along with the memories of those scenarios also come the strategies used to address or avoid them.”

White says that during these high-stake moments, investors often tap into what he calls their “emotional templates.” He breaks these personality types into three categories: fixer, survivor and protector.

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White describes the “fixer” as a leader who is not afraid to take risks. A “protector” is someone who is less prone to risk and more defensive. Meanwhile, a “survivor” is someone who tends to stay the course of a defined strategy despite immediate challenges.

“Each has his strengths and weaknesses, and each is expected to react to high-risk situations such as market volatility differently,” White explains. “Therefore, it’s crucial for advisers to know which ‘emotional templates’ their clients reflect.“

This knowledge, he argues, would help consultants anticipate how clients may react during times of market turmoil, while also understanding what approach they should take to guide these individuals through turbulence.

“When the market sells off, the fixer would take risks to get even or to get ahead of everyone else,” says White. “They have to win.”

White explains a different outlook for protectors.

“They’re so anxious that they can’t stand the pain of loss and may flee the markets,” White adds. “The survivor is sort of the opposite. The survivor hangs in there maybe longer than they should. They’re committed to their causes and are almost risk neutral.”

White adds that “Survivors can stay invested in stocks longer than they should be, so the adviser needs to gently tie back that indifference and say, ‘We need to make a change and resolve this issue.’”

The author explains that working with a “fixer” is a different story.

“The fixer will actively ignore what the adviser is saying,” White warns. “It doesn’t do any good to oppose a fixer. You have to work with them to address problems, not against them.”

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According to a recent poll by Eaton Vance, more than eight in 10 advisers cited fear as the primary motivation for their clients. A 2016 Employee Financial Wellness Survey by PricewaterhouseCooper found that more than half of respondents reported stress about finance, and 45% said it increased in the last 12 months.

White argues it’s crucial to take a gentler approach with some clients; it is also important to note that people tend to find the threat of loss more significant than the anticipation of equal gain.

“Researchers have discovered that losing money in the stock market, say $1,000, was twice as painful as the amount of pleasure gained from winning twice that amount,” says White. “The ratio can be 2 to 1, but some researchers suggest it could be even higher than that.”

In his book, White dives into the idea that people react to the markets based on their childhood experiences. Of course, this isn’t always something the average person would want to spend time talking about with a financial adviser.

White describes learning about a client as a process that involves plenty of active listening. He reflected on one instance when he was talking to a client on the way to lunch, and ended up learning about how his family lost almost everything following a house fire when he was a child. This helped White analyze the client’s “sense of loss” and “emotional template.”

Carla Dearing, CEO of online financial-planning service Sum 180, often works with people who have lost a lot. She stresses that it’s important to help these people understand that they’re not doing as bad as they think.

She says she has found people to be somewhat relieved when they find out financial burdens such as their credit card debt is not as bad as the national average, for example. “The first thing a lot of people say to me is, ‘I found out I was doing something right,’” Dearing explains. From there, she tries to help clients identify their financial goals and provide them with “bite sized” steps to meet them.

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Despite the technical and analytical systems that go into creating personalized roadmaps for her clients, Dearing says simply sitting down and listening to clients talk can be just as important in her line of work. White agrees that keeping an ear out for what clients are saying (or not saying) can help advisers determine the emotional templates they reflect.

“Through meetings, you’ll hear more and more stories and they will often venture and tell stories about their life and even their childhood,” White says. “That will bring forth a wealth of information. Pay attention to language they are using … I believe it is the secret ingredient for making much better decisions and having much better relationships.”

 While learning clients’ personality traits can be extremely helpful for advisers, White and Dearing conclude that it’s also crucial for advisers to understand their own emotional templates. By learning their own personality traits, White believes advisers can better understand the kind of approach one should take when consulting a particular client.

“Don’t go in full force with a protector, they’ll just get terrified,” suggests White. In addition, White says it’s critical to understand these concepts before times of heightened market volatility and peril.

“They need to get to know their clients before the market is in turmoil because you want to build a sense of trust and relationship while things are relatively calm,” White explains.