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Client Money Personalities: The 'Entrepreneur'

Overconfidence is a common personality trait exhibited by advisors' entrepreneurial clients.

Justin A. Reckers and Robert A. Simon, 03/22/2012

We ended last month with some talking points to help advisors begin to understand the money personalities of their clients. To continue the conversation, we want to give some examples of typical discussions you might have with clients and the underlying personality features that might be coloring their decision-making.

The Entrepreneur
We all know an entrepreneur. Maybe a brother-in-law, maybe a neighbor, maybe a client. So what makes them tick? Is it ambition, creativity, perseverance, a dislike for taking orders from a boss, or perhaps a penchant for taking risks? More importantly, can you as an advisor recognize these personality traits and better understand your client? And can you understand how this money personality impacts your client's investing goals and preferred approach to investing?

Many of the advisors reading this article probably consider themselves entrepreneurs. The majority of you are responsible for creating new business or got to where you are by having generated new business at some point in your career. What can you learn from your own personality? (The authors think of themselves as entrepreneurs because we are independent, self-employed, and self-directed--we establish goals and chart a path to achieve them.)

In conversations with entrepreneur clients we have learned that what motivates someone to be entrepreneurial and to accomplish ambitious goals is multi-determined, complex, and individual. We asked some clients why they thought they had become entrepreneurs. A biotech entrepreneur told us, "I had such a great idea that I couldn't let it go, and no one else would listen so I had to do it myself." A serial technology entrepreneur told us, "I don't really know. I think I was left without a job at one point in my life. Faced with the possibility that I may not be able to feed my family I had to do something. Luckily I had an idea and wouldn't take 'no' for an answer." A CEO for hire in the start-up world told us, "I probably have attention deficit disorder because I come into ideas and opportunities with a limit to how long I will spend on something before moving on. That means I am constantly getting involved in new and different endeavors." A successful attorney who built a large firm told us, "I wanted to practice law my way and the only way to do that was to strike out on my own."

We do believe there are some common characteristics of entrepreneurs. One of them is overconfidence. The most endearing part of overconfidence is that it makes entrepreneurs very confident in their inventions, ideas, and decisions. They don't take 'no' for an answer, and they stay motivated when things are difficult. They tend to see what is working versus what is not working. But that also means they make economically irrational decisions on a regular and consistent basis!

Interestingly, overconfident clients are often procrastinators. Although this may at first seem unexpected, overconfident people tend to procrastinate on current matters in favor of future opportunity. Thus, advisors must teach these clients the concept of how paying themselves first is a giant step in their financial planning and wealth accumulation. This is because such individuals' overconfidence makes them unrealistically sure of their ability to keep generating flow. This leads them to think of how to make the next dollar rather than how to keep and grow the dollar they already have.

Entrepreneurs are often affected by a flaw in their planning skills that leads them to underestimate the time necessary to complete tasks. This, in turn, may prompt them to label such tasks as unimportant and, therefore, it is less likely that the task(s) will be completed. Whether rational or not, the mindset is consistently focused on the future because the entrepreneur is driven by the future, by opportunity and by risk taking.

Entrepreneurial personalities are often plagued by cognitive errors caused by the illusion of control and subsequent problems created by such individuals taking on escalating commitments. The illusion of control colors the decision-making of overconfident clients as they believe they have more control over a situation or variables than could rationally be explained.

The biggest struggles you will have with overconfident clients will be those where they really need to accept and act on your advice when it is counter to their own gut feeling. Overconfident clients may believe they are smart enough to do your job and rationalize their seeking your advice based on simply not having enough time to do it themselves.

Noted psychologist Daniel Kahneman said, "Overconfident professionals sincerely believe they have expertise, act as experts and look like experts. You will have to struggle to remind yourself that they may be in the grip of an illusion."

So how do you know when a client may be suffering from overconfidence bias? Conversation topics should include:

--How did the client acquire their wealth?

--How realistically difficult was it for them to acquire the wealth? Have they risked their own capital to attain greater wealth?

--Has the client regularly sought the guidance of trusted experts?

--Do they often underestimate the amount of time or effort necessary to complete tasks?

Overconfidence is just one of many personality characteristics we encounter in financial decision-making. The exact combination of characteristics or qualities that form an individual's distinctive character as a successful entrepreneur remain elusive, but we do know some tell-tale signs.

A client's overconfident, entrepreneurial personality is the fundamental template through which they view the world. It affects risk aversion and complicates financial decision-making. If you, as an advisor, better understand the template they are working from, you can better guide them through the decision-making that will help them pay themselves first and take advantage of the opportunity their ambition and perseverance offers.

Next month, we will continue discussing common personality traits and guiding you through the process of uncovering them.


Justin A. Reckers, CFP, CDFA, AIF is director of financial planning at Pacific Wealth Management www.pacwealth.com and managing director of Pacific Divorce Management, LLC www.pacdivorce.com, in San Diego.

Robert A. Simon, Ph.D. www.dr-simon.com is a forensic psychologist, trial consultant, expert witness, and alternative dispute resolution specialist based in Del Mar, Calif.

The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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