Psychiatrist and hedge fund manager Richard L. Peterson, MD, discusses his patented conversation guide for advisors: Inquire, Describe, Empathize, Add and Suggest (Ideas).

Q. Why is psychology an inherent part of practicing financial planning?

A. It's because you are not only dealing with the numbers, you are also dealing with the people who generate the numbers. You're working with their inability to stay disciplined or control their impulses about their finances. You're dealing with their excitement about some things that can sometimes take them overboard.

A computer can deal with the numbers, but a human financial planner has to go beyond that and deal with the clients; and how they react to volatility in the market or how they react to changes in their income because that is where they can really become irrational and sabotage their own plans.

Q. Why do advisors make mistakes while communicating with emotional clients?

A. Most advisors retreat to the numbers when they feel someone is attacking their process or criticizing their work, so they feel defensive. They are taught that their expertise lies in the numbers, but, in fact, the expertise of the best financial advisors lies in their ability to relate well with clients, and their ability to maintain their trust and connect with the client.

Q. Is that why you developed the (IDEAS) script?

A. We have so many advisors who are losing business because they were essentially becoming defensive when clients were emotional, or they did not know how to communicate with clients who were emotional. Every client at sometime will become somewhat emotional, or at least irrational. It's not like clients come into the office and say 'I think you're a terrible advisor. I'm finished.' The best advisors pick it up through the missed phone calls, the lateness to appointments. [Clients] really need someone to meet them where they are emotionally. It makes them feel invalidated when an advisor responds to fears with lists of numbers, graphs or charts.

Q. If an advisor is working with a new client who is being emotional, how should they proceed with the meeting?

A. The key is to not gloss over what is going on. The first thing is to say: 'Let's talk about this. It seems like you are in a pinch.' Just that one technique is something that will capture a lot of business for a financial planner. After you've asked a few questions to clarify, say, 'Let's see what we can do to help.' Let them tell their story. Everybody has a story and they need to tell it.

Q. What is the structure of MarketPsy Long-Short Fund?

A. MarketPsy is a hedge fund. It identifies psychological events that are likely to cause mispricings in stocks. For example, the excess of fear on the message board might correlate with a good buying opportunity. We are scanning 6,000 stocks every day. The fund is up 48% since it launched 12 months ago.