Help clients navigate emotions and make good financial decisions

Money has no feelings. The stock market has no emotions. Mutual funds and GICs never wake up on the wrong side of the bed.

People, though, experience all that and more, and psychology can play a big part in the decisions people make and how advisors guide them to achieve their goals, according to Lisa Kramer, a professor of finance with the University of Toronto.

“Clients, of course, are humans, and humans have brains,” Kramer said. “So, we need to take account of human psychology when we’re helping a client. A wealth of research shows that people don’t always make financial decisions in a way that’s in their own best interest.”

Advisors don’t need to go back to school to study psychology, she said, but they need to understand that people are not robots and it’s not realistic to expect them to make dispassionate choices.

“What an advisor can do is act as an intermediary when someone is attempting to make a decision for reasons related to panic or greed,” Kramer said. “For example, they can step in and say, ‘Let’s wait a beat. What are the long-term reasons you got into this investment? And are they still valid? Do we necessarily want to do something impulsive that could end up undermining your well-being?’”

Getting clients to slow down can help them avoid impulsive acts — like trying to buy low and sell high, or rapidly turning over investments — that often backfire and result in underperformance, she said.

Set clients up for success

Advisors can implement certain behavioural concepts to help clients make the best choices. For example, Kramer pointed to research involving cafeteria food options.

“If you put the healthier items within reach and the less healthy items a little farther back … people tended to grab the apple instead of the chocolate bar,” she said.

Advisors can design financial planning in a similar way by helping people relate better to their future selves. A 2018 study from the University of California, Los Angeles, found that when young people were shown manipulated photos of what they will look like as seniors, they were motivated to commit more money to retirement savings.

“They’ll choose the option to save rather than consume,” Kramer said. “We can help clients understand what their future needs are going to be in retirement and help them connect more closely to their future self.”

Uncover the motivations behind the emotions

Alexandra Stadnyk, a wealth advisor with CIBC Wood Gundy in Toronto, said wealth management has been evolving and, as a result, it touches on far more personal things than it did in the past.

“In the ’90s, [wealth management] was calling a broker up and selling stocks,” she said. “Now? It touches on estate planning, on taxation, on many emotional things. If we accept the fact that money and emotion go hand in hand and are not separate from each other, then we can make that money work for the client better.”

She recently had a conversation with a client who was overfocused on maximizing her TFSAs. The client was a successful professional, earning a lot of money and starting her own business, Stadnyk said.

Stadnyk posed what she calls the “miracle question” to the client: “If I wave a wand, and all your financial worries are fixed overnight, what does that look like?”

For this client, the answer was $50,000 sitting in her chequing account.

“Then we started talking about her values, and security was one of her predominant values,” said Stadnyk.

That was incredibly useful information to have as an advisor, she said. All the talk about TFSAs and her business didn’t really matter. The only thing that would make this client content was that $50,000 in cash.

“Sometimes in financial planning, the worst advice on paper is the best advice for the clients,” Stadnyk said. Advisors sometimes need to “humble” themselves and understand what is truly best for their clients, she said.

Explore feelings and help put them in context

Kathy McMillan, a wealth advisor, associate portfolio manager and investment advisor with Richardson Wealth in Calgary, said the things that impact money the most are fraught with emotion — including divorce and losing a job.

One of her clients recently lost her job and reached out to McMillan with a panicked email. They arranged to get together the following day.

“She came in, pupils dilated, total shock,” McMillan said. “I didn’t say anything about numbers. I said, ‘Tell me all about it.’”

The worst time to make decisions is during times of stress, McMillan said. She sat with the client, listened, and eventually took out a pen and wrote down the client’s biggest worries, which included losing access to her dental plan and buyer’s remorse over an expensive e-bike purchase.

The client confirmed, however, that she got a good price on the bike. And when McMillan asked the client what brought her joy, she said riding the bike in nature.

“Well, then, she’s keeping that bike,” McMillan said. “I had run the numbers, and she was going to be OK.”

Her advice to advisors is to stay curious and ask questions.

“If we’re investing your money, and we haven’t a clue of your life and situation? I think that’s sketchy,” McMillan said.