How to Become a Behaviorally Smart Advisor
The financial services industry needs new business models – ones that help re-define what a financial advisor is capable of beyond just a numbers oriented investment orientation. The traditional twenty-five year + model of providing investment access and selection is being disrupted by technology and new players coming from other industries. The friction from this evolving operating environment seems to be leading to exploring more holistic and new client-focused experiences that create more engagement and deeper connections.
The Institute for Innovation Development, to explore this further, recently talked with Leon Morales, Managing Director of DNA Behavior International – a behavioral finance technology platform designed for financial advisors to “Know, Engage and Grow” their relationships with their clients and prospects. We discussed the evolving nature and changing value proposition of financial advisors into this more holistic model with advisors serving as client behavioral coaches and mentors.
Hortz: You have frequently quoted from the Spring 2000 Journal of Investing article that states 93.6% of the financial planning process is the behavioral management of clients. We have always understood that being an advisor is, bottom-line, a relationship business but, what does that number tell us about the true nature of the financial advisor role?
Morales: All the studies and resulting data that have looked at the issue appear to agree, that client behavioral management is one of, if not the, most important function of financial advisors. Understanding the client’s communication style, personality, emotions and fears, these need to be mastered and managed by the advisor. Learning practical ways to understand the individuality of clients, how they make decisions and what triggers their emotions, are key to being able to guide the client over the longer term successfully, coaching them to truly achieve financial goals. What this points to is the ultimate importance of advisors being behavioral managers as much as they are technical managers of investments.
Hortz: What do you recommend as the key steps advisors must take to start strengthening their behavioral IQ and behavioral management skills with clients?
Morales: The most important step required for moving from the traditional financial advisor role to that of a Wealth Mentor is to learn first how to ask much better questions of the client. This enhanced discussion builds greater client relationships and opens the dialogue to reveal core behaviors, biases, reactions under pressure and other issues. Part of our Certified Wealth Mentor program's takeaways is a list of many key conversationopener questions, used for client meetings. Further, the questions will encourage the clients to probe their own thinking. The advisor then gains insight into how the client makes decisions, the client's reaction to taking a new direction, or confirmation they are on the right path.
Together with insights from our behavioral reports, this enables the advisor to identify points of alignment between what’s stated in the report, versus what clients are saying. This comparison enables the advisor to zero in on the client’s areas of strengths and struggles and narrows down the tension between processes and behaviors that might get in the way of delivering outcomes. This kind of client connection, using our very concrete system, builds long term advisor/client relationships and advisors will know how to manage client bias and reaction under pressure.
Hortz: What are some predictable insights you can discover about your clients?
Morales: Our DNA Discovery process delivers insights in several key areas:
- Communication – enables advisors to connect and work with the client on their terms
- Biases – awareness of assumptions or mental habits that need managing
- Spending patterns – uncovers money habits that may impact investment strategies and outcomes
- Risk tolerance and reaction to market movement – provides detailed behavioral insight into the client's natural risk tolerance and risk propensity
Hortz: Can you walk us through your claim that a behavioral approach, using your wealth management platform, results in 99.5% client solution suitability and additional client value?
Morales: The use of the Financial DNA behavioral approach enables the advisor to more deeply engage with their clients. Asking the right questions, and having a robust discovery process that more rigorously breaks down all the elements that make up risk, to a much tighter client discussion, reveals how much risk really needs to be taken, how much risk could financially be taken, and blending learned behavior and natural behavior to cover the right level of risk. Behaviorally smart advisors -who manage these conversations with the client well - will get a much higher level of suitability in what they recommend and what gets deployed or purchased in the end.
Dalbar research shows that 7.45% a year is the potential loss because of investors not having an advisor and making poor decisions. There is safety for clients in having a behaviorally smart wealth mentor manage their portfolio, rather than trading their own accounts. This goes back to the risk profiling where we believe we can get to 99.5% clients solution suitability. Therefore, 91% reflects accuracy from the DNA Natural Behavior Discovery and the other 8.5% comes from the learned behavior discovery.
Hortz: Do you see an evolution in what a financial advisor's core job is and how they will be perceived in the future?
Morales: Yes. I believe that the advisor needs to become a guide for life for the client and to be able to navigate all the issues clients might face. When the client sees the advisor as their ‘go to’ person for help with decisions, a trusted collaborator, that not only impacts their financial and investment world, but also life decisions and choices, all of which are foundational and have financial consequences. This kind of advisor-client relationship opens wider conversations regarding family dynamics. Advisors need to be the family advisor, and that's going to be a big area for them in the future. To do that, they need to broaden their skills to handle a wider range of areas, or at least be able to communicate about them.
Importantly, a core adjustment required is the change from client meetings to client conversations. The word conversation makes the advisor/client engagement process easier, less formal, more likely to deliver open discussions. This adjustment is the process we have been bringing in to some of the firms we have worked with recently.
Hortz: How do you help advisors change their habits and ways of doing business to help them evolve into this new advisor business model?
Morales: While education and our Certified Wealth Mentor Program are an important part of the process, a key strategy for DNA Behavior International, in order to help advisors make this happen, is to embrace our role as a behavioral Fintech company. We can now take our behavioral tools, processes and knowledge and embed that into their practices through an easy, accessible, online behavioral platform which provides them with practical and scalable behavioral intelligence across every client and firm employee. They would have readily available behavioral awareness, using our built-in discovery processes, and real-time behavioral management capabilities using our apps. Behavioral management can now be infused into the DNA of the firm.
Hortz: Tell us a little about your steadily growing list of strategic partners (BrilliantFIT, AMP) and how you work with them in extending your behavioral platform and resources to equally support advisors, clients, and other key financial services vendor firms?
Morales: We have a wide range of technology integration able to be deployed, not just in the financial services arena, but across many disciplines and industries. With Financial DNA, we are a leader in the deployment of personality and behavioral based tools, but we also have such relationships as our hiring partner Brilliant Fit, based in Melbourne, Australia. They are making inroads by integrating behavioral discovery to the filtering of candidates for management roles and ongoing career development.
We built an alignment with Salesforce, so DNA insights are on the Salesforce platform. We are also currently working with firms on ‘matching advisors to clients’ based on personality styles. We work with big data to open a significant access to leads by building algorithms to be able to link that data to personalities. We are working with a range of financial planning software groups globally using our “behavioral chip strategy” to power the behavioral management of the client experience.
Hortz: From your perspective in building to and working with a wide cross-section of financial advisors, what is your best advice for advisors in how to navigate this changing business environment in which they are now operating?
Morales: From my perspective, the first key point would be for advisors to develop their emotional intelligence (EQ). Personal development will make them more effective advisors as they interact with a wider range of clients. Maturing professionally in this way will make them a better advisor in guiding others through life challenges – again, an expansion of their roles beyond financial guidance. This approach is what will lead to sustainability of the relationship.
Also vitally important are building more processes inside their businesses, particularly around technology, to enable a customized experience to be delivered. Introducing good technology releases advisors to build business and identify gaps where they need to hire and develop good teams.
A further key area is looking at existing revenue models. The current approach needs to be reviewed considering the changing role of advisors with the ability of advisors to become behavioral coaches to their clients. Knowing the importance of behavioral management, advisors can use these behavioral insights to look at how they make their money.
Delivering goals-based financial planning means advisors need to look at how they bring in a retainer fee for working with the clients on an ongoing basis. The new revenue model needs to reflect: running the annual meetings, helping the clients work out their goals, navigating difficult decision-making situations and transitions. Price points can be reviewed, as they add value through mentoring - coaching clients on how to manage their behaviors towards their goals.
I’ll leave advisors with one of the favorite quotes of our founder, Hugh Massie: “Strict rationality kills culture and relationships, and unmanaged emotions destroy wealth.” Financial advisors will be well served to be able to deeply engage and reconcile client thinking and behavior with that client’s life and wealth goals.
Written by Bill Hortz, Founder & Dean, Institute for Innovation Development
The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors - Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). For more information click here .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.