Here’s How A Financial Adviser’s Role Changes Into A Coach

Posted on August 29th, 2019
Articles Financial Management Thought Leaders

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By: Dan Kemp, Chief Investment Officer of Morningstar Investment Management Europe Ltd

There has never been a better time for great financial advice, but it may not feel that way when financial advisers get calls from jittery clients in difficult market conditions.

While financial planning is always focused on the long term, investors often become obsessed with the short term asking when the market will start improving, what you, their adviser, are doing about it, whether they should exit the market, and retreat into cash holdings?

What they’re really asking for is reassurance. Investors are human, after all, and suffer from human behavioural biases. These biases tend to manifest themselves during periods of stress, resulting in poor decisions making that subsequently ruins the investment outcome for investors.

Investors are human, after all, and suffer from human behavioural biases

Many financial advisers will already be familiar with biases such as ‘loss aversion’ and ‘recency bias’ that can encourage nervous investors to exit the market and sit tight on a cash pile at just the point when investment opportunities are most attractive.

To help investors in this situation, it is necessary to go beyond the traditional role of the adviser as a financial expert and take on the role of behavioural coach.

This approach conveys the added benefit of differentiating the adviser who adopts it from those that are product or sales orientated. In a world of unprecedented access to information and research, this differentiation can make a significant impact on both your clients and your practice, as no amount of data can help investors make the quality decisions needed to maximise their long-term returns. That is your job.

Go beyond the traditional role of the advisor as a financial expert and take on the role of behavioural coach

To become an effective coach, though, financial advisers need an understanding of the biases investors suffer and a ‘toolkit’ of strategies to help guide their clients.

A good starting point is to first understand and control our own behaviour. I come across many investors that do not have their own financial plan and focus on the short term when making or assessing investments. In order to be an effective coach, we need to ‘walk the walk’ as well as ‘talk the talk’. No one would accept a coach potato as a fitness coach and we can’t expect investors to accept someone focused on the short term as their financial planner.

The second key requirement for coaching is to have sufficient time with the client.

In an environment where investors are assailed by market noise, it is essential that advisers are available to help clients make the right decisions. This is likely to require more frequent contact than the traditional annual review and therefor it is essential that advisers create more time in their diary by making their business more efficient.

For some this will mean making greater use of digitisation, for others it may be outsourcing investments or even employing additional staff to take care of the administrative work. Whichever approach you adopt, the key is to free up more time to spend with your investors.

Encourage them to make better decisions

As with all forms of coaching, one of the key challenges is breaking bad habits of the past. Unlike fitness coaches, we are unable to stand next to clients in the park while they break these habits and so we must place a greater emphasis on communication. This is made especially difficult for advisers due to the impact of vivid past experiences in the financial life for the client. We can all recall situations where we made expensive financial mistakes and those mistakes are never far from our mind when making new decisions.

Coaches therefore need to ‘fight vivid with vivid’. In the vivid moment of the call, give your client your most vivid example of other investors who followed the herd and lost. Then give a vivid, real, personal example about someone who stuck to their long-term plans through a speedbump and did really well.

It’s all about changing how people process choices in a way that encourages them to make better decisions.

The days of advisers being technical experts and investment selectors are long gone. In the new world, time with the client is far more valuable than in the past. If we are to build successful and sustainable businesses, we’re going to have to adopt a new business model to facilitate this greater allocation of time. While this may be daunting from some advisers, I have never met one who wanted to spend less time with their clients. Good luck coach.