Investors need you. But you need to frame the narrative.

Mar 22, 2023

One of the most provocative indicators of bad investor behaviour is the Behaviour Gap. This term (coined by Carl Richards) describes the difference between the return an investment organically produces over a fixed time frame, and the return an investor in that very investment actually earns.

It tells us two things:

*Investment Returns and Investor Returns are almost always different.

*The result is usually not in the investor’s favour.


Investment Return is based on the assumption that the investor invests and holds tight over a particular period. Investor Return measures real-life return based on activity - buying at the peak of a market, exiting at the first signs of a bear market, and switching from one investment to another in search of the next magic bullet.

Let me cite some annualized numbers. Morningstar’s recent study showed that the Investor Return for commodities funds was 6.9%, but the Investment Return was 13.23% (gap of -6.34%). When it came to technology funds, the gap was -24.31% over 3 years and -20.99% over 5 years! Dynamic bond funds displayed a gap of -2.65% over 3 and 5 years. Multi-cap funds showed a gap of -2.18% over 3 years, which got tempered down to -1.03% over 5 years.

Who’s at fault? Not the fund. Not the market. Not the advisor. Not the distributor. Not the economy. It is the behaviour of the investor. They are their own worst enemy.

With the rise of social media influencers, there is a misplaced confidence amongst DIY investors. They shoot themselves in the foot with their bad behaviour. So what do you do about it when faced with a potential client?

6 questions to potential clients

Always be straight. “I don't think for a moment that you are stupid or dumb. But you could be irrational.”

When it comes to money, there are a myriad of underlying emotions at play that eventually manifest by way of fear and greed. There is hope, that you will give your children a great education. There is desire, to give your parents a life they could never afford. There is optimism, that you will create a nest egg and not have to depend on your children. There is desperation, to make ends meet. There is despair, at seeing your savings plummet. How can one be rational when so many deep emotions are screaming at us to act?

So whether the investor knows it or not, they need you. But it is up to you to frame the narrative. You have to convince them why they need an expert who has their best interests at heart. Not because they are dumb, but because they need someone who can keep cool and bring objectivity and rationality to the table.

The adviser of the future

Convince them that you put them first. “As an investor advocate, I care about outcomes.”

No matter how popular, robo-advisory does not always add up. Sure, it makes life convenient, but can drive very bad financial outcomes. In turbulent market phases, there is nothing more calming than hearing the voice of another human who reassures you that they have your back, and is committed to helping you reach your goals.

Money is emotional and provokes impulsive responses. Buy and sell impulses are dangerous. That is when they need someone to walk them through those emotions and keep the impulses under control. This is why I say that the investor needs you but is unaware about it.

The best referral strategy

Empower them. “Tell me exactly what is worrying you.”

Get them to articulate their emotions. Move from “I am scared of being old and broke” to “I feel scared because I have not made the right investment choices for retirement”, or “I am scared of losing my money” to “I feel scared that this down market may never rise”.

This makes them aware that they are not that emotion. And, that the emotion is temporary. When they realize that they are greater than what they are feeling, they will be more receptive to what you bring to the table. Acknowledging an emotion allows one to step back and make a smart choice. Emotions are just a form of energy, seeking expression. Once articulated, they can be better managed.

Financial advisers must improve client engagement

Convey a partnership. “Wherever you are in your journey, I will meet you where you are.”

A friend told me how she approached an independent financial adviser (IFA) who “talked at her, not to her.” She admitted that she was not well versed with money matters and certainly not with investing, but she also knew that she was not a dolt.

People are immediately uncomfortable when they sense that the other is being condescending, and they take that as an affront on their character. When criticizing actions or decisions made, emphasize that the behaviour is no reflection on their character or who they are. His attitude cost him a good client, and numerous referrals too.

My message is simple: Control the narrative. 

4 questions you must ask clients  
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Apr 30 2023 09:41 AM
Very good insights indeed. I clearly speak out that often Advisors armed by years of experience and being self-patronized tell clients that THEY KNOW IT ALL. This attitude put the Clients on the backseat, and they start feeling awkward and resent opening up about their aspirations, inhibitions in front of such Advisors. A compassionate and helping attitude would resonate through one's actions and body-language. Clients feel extremely comfortable and open up with their dreams and Goals.
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