Why you need to know how your clients feel about money

What is money? The answer is different to many, but at its core, money is stored value. Now the way we all think about money can be different depending on a variety of factors like where it came from (work vs. a gift) or to whom you’ve mentally allocated it to (yourself or someone else).

An extremely large part of our job as financial professionals is to help people understand these dynamics so their money can have the desired impact. All money isn’t equal, and we should recognize, acknowledge, and lean in to that fact with our clients. I feel that this is what will differentiate us beyond lists of accounts, cash-flow analytics, and net worth statements. In my mind, the data and dollar amounts are essential to our client relationships, but I challenge you to consider other essential elements where you are less likely to focus.

As an industry, we can underemphasize the human, or relationship-based, aspects of our business, and this is where advisors can differentiate themselves. When you meet with your clients or onboard prospects, you should have a systematic set of questions that helps you get at their underlying motivations and how they want to work with you moving forward. To systematically understand the human beings you work with, first get to know their views on the following behavioral-finance criteria.

Confidence in the ability to understand financial and investment information will help you tailor your message and materials to your clients' comfort level. It's important to know the following things about your clients' views, for the following reasons:

Future optimism related to the economy and markets (short and long term): will help you understand why certain risks and solutions resonate (or not).

Desire to be involved in day-to-day financial and investment decision-making: will help you determine how you should design your relationship with your client on almost every level (and who is involved in decision-making).

Purpose to working with you -- especially in regards to providing for lifestyle needs (now and in the future): will help you identify spending patterns and enable you to set up the right ongoing distribution strategy.

Family focus with respect to providing for dependents, which would include education, family members with special needs, children, and parents: will help you unpack what matters most and why.

Feeling around having enough -- just enough, more than enough, or not enough -- to get to where they want to go: will help you prioritize collaboration with your client.

Giving, and whether it is a focus in their family or the community: will help you provide suggestions related to advanced planning and legacy considerations.

Voices Break your clients of market prediction addiction

Probabilistic forecasts provide a durable framework for a sound financial future, the author says, and offers some for the new year.

January 7

Allan S. Roth

Wealth Logic

Framing matters

When you’re seeking to understand your clients, how you frame your questions to them matters. When you know a client can either give more to their family or spend more on themselves, for example, how do you ask what their preference is in a non-judgmental way? How we choose to frame things may communicate our feelings, perspectives, and perhaps even the decisions we think someone should make. In fact, framing is so influential, there have even been laws passed about it. For instance, grocers framing ground beef only in terms of how lean it is (“85% lean”) made it so difficult for consumers to make informed choices between lower or higher fat products that it led to the law being changed in 2012 to require ground beef to be fully framed (“85% lean/15% fat”).

We frame information with, and for, prospects and clients each day – so being intentional is important. However, what is even more interesting is that human beings frame information for themselves, too. Are you aware of the internal frames your clients are using to make decisions? Consider, for example, the “disposition effect” found by researchers Shefrin & Statman. The disposition effect shows us that people tend to frame their investment positions as having gained or lost value, which affects their investment decisions. Specifically, since humans tend to be relatively risk averse when evaluating gains (“I want to get money out while I’m ahead!”) and risk seeking when evaluating losses (“I want to get back to even!”), research suggests investors sell positions they’ve framed as winners more quickly than losing ones — which can be an unproductive strategy. As trusted advisors, we can help collaborate with clients to recognize how their internal frames of reference affect their decision-making, which can move them to even more positive outcomes.

Framing and family in uncertain times

Family is a common place where we can add extraordinary value as professionals. Often clients want to know how much is too much to give to children, and if too much will make them unproductive, or not enough makes them resentful.

Research will tell you that there is a crossover point where more money stops making you happier— and in fact starts making you less happy. That average amount in North America is $105,000 in annual income. Why? One hypothesis is that it’s easy to say “no” when you truly cannot afford it, but at some point, as income and wealth increase, it becomes more difficult to say “no,” because it’s more of a value judgment than a question of affordability, which can lead to disruption in one’s family and social life.

Ultimately, there are no right answers to these questions, but a key way forward is to discuss the following with clients: How much would create a comfortable lifestyle for them? And can they truly afford to spend and give beyond that? Knowing their thoughts on these topics will enable you and your clients to have ongoing, collaborative discussions around what makes sense when giving financially to family and the community, and what makes sense based on their values and goals. This is particularly important in our current environment where many clients are acting as the family or community bank to help others manage through this challenging time.