The Accumulator behavioral investor type can be among the most difficult to advise.
This month's article is the 12th in a series called "Building Better Client Relationships by Understanding Investor Types." This series is intended to help advisors create great working relationships with their clients by taking a step back and understanding the type of person they are dealing with (from a financial perspective).
Individuals are different in the way they process information, vary in the way they behave when faced with a financial decision, and have different risk preferences, so it is essential that advisors interact with each client effectively. This often means that you must change the way you speak to different types of clients even though your advice may be similar across your client base.
Some advisors fail in their tasks not because they don't have technical knowledge of the markets, understand the strategies of investment managers, or have systems that can deliver the best methods of portfolio construction, but rather because they don't understand what is truly important to the client and how to communicate and interact in a way that is meaningful and effective.
As you know by now, I have dedicated a substantial amount of time promoting the benefits of behavioral finance research and making it accessible to large numbers of financial advisors. In my latest book, "Behavioral Finance and Investor Types," my primary objective was to simplify the practical application of behavioral finance by boiling down many of the complexities involved in diagnosing and treating behavioral biases into the simple concept of investor types, which I refer to as "behavioral investor types," or BITs. BITs are defined in large measure by the biases themselves and are categorized in a way that makes intuitive sense and can be easily understood.
There are four behavioral investor types: the Preserver, the Follower, the Independent, andthe Accumulator. In the last article, I reviewed the Independent BIT. In this article I will review the Accumulator BIT.
Accumulator Behavioral Investor Type
The Accumulator BIT describes investors who are interested in accumulating wealth and are confident they can do so. These clients have typically been successful in some business pursuit and believe in themselves and their ability to be successful investors. As such, they often like to adjust their portfolio allocations and holdings to market conditions and may not wish to follow a structured plan. Moreover, they want to influence decision-making or even control the decision-making process, which potentially can diminish an advisor's role.
At their core, Accumulators are risk takers and firmly believe that whatever path they choose is the correct one. Unlike Preservers, they are in the race to win--and win big. Unlike Followers, they rely on themselves and want to be the ones steering the ship. And unlike Independents, they usually dig down to the details rather than forge a course with half the information that they need.
Unfortunately, some Accumulators are susceptible to biases that can limit their investment success. For example, Accumulators may be too confident in their abilities. Because they are successful in business or other pursuits, why shouldn't they be successful investors? And overconfidence sometimes leads them to think they can control the outcome of investing, despite the fact that it is full of unknown risks.
Accumulators can also let their spending get out of control at times due to the "wealth effect"; their level of assets can lead to lifestyles that are more extravagant than prudent. Accumulators also may make investments based on how the opportunities they come across resonate with their personal affiliations or values.
Accumulators' risk tolerance is quite high, but when things go the wrong way (i.e., they lose money), discomfort can also be very high. This discomfort may arise not only from financial loss but also from the blow to their confidence and the realization that they cannot control the outcomes of investments.
Some Accumulators can be quite difficult for advisors to build close relationships with, because these clients are attempting to make their own decisions rather than relying on the advice and counsel of their advisors. These clients are entrepreneurial and often the first generation in their families to have created wealth, and they are even more strong-willed and confident than Independents. Left unadvised, Accumulators often trade too much, which can be a drag on investment performance. Furthermore, they are quick decision-makers and may chase higher-risk investments than their friends. If successful, they enjoy the thrill of making a good investment. Some Accumulators can be difficult to advise because they do not believe in basic investment principles, such as diversification and asset allocation. They are often hands-on and wish to be heavily involved in the investment decision-making process.
Upside/Downside of Accumulators
Certain benefits accrue to Accumulator BITs. Accumulators are confident in their abilities, and as such they are more likely to put their investment ideas into action. As I have written before, successful investing requires the fortitude to not only have conviction about investing ideas but also the confidence to put plans into action. In short, Accumulators have the confidence to act decisively.
They also understand what it takes to be successful--that is, hard work and determination to succeed. Therefore, they take the time to understand investment opportunities and examine the details of what they invest in. Lastly, they understand that accumulating wealth is about accepting risk; not all investors grasp the significance of taking risk. This is not to say that Accumulators are overjoyed when things don't work out, but they typically understand that not every decision is going to work out well.
The downside to the Accumulator BIT relates mainly to biases such as being too confident that things will go their way and believing that no matter what happens, they can exert some level of control over investment outcomes. In reality, overconfidence usually leads to poor investment results, either because these BITs feel like they can outsmart the markets on a regular basis or because they trade too much. Similarly, believing that investing outcomes can be controlled is a fallacy; there is so much uncertainty about investing that investors who believe they can control outcomes are not accepting the reality of the situation.
As we will see in the next section, Accumulators also may have trouble controlling spending, may invest based on what they relate to in other parts of their lives, and may be too optimistic in their investing endeavors.
Accumulator clients are often the most difficult to advise, particularly those who have experienced losses. Because they like to control or at least get deeply involved in the details of investment decision-making, Accumulators tend to eschew advice that might keep their risk tolerance in check. They are emotionally charged and optimistic that their investments will do well, even if that optimism is irrational.
Some Accumulators need to be monitored for excess spending, which, when out of control, can inhibit performance of a long-term portfolio. Other Accumulator investors make investments that align with their world-view but may not be the best investments for the long term.
For advisors, a reasonable approach to dealing with these clients is to take a leadership role in the situation. If the advisor lets the Accumulator client dictate all the terms of the advisory engagement, they will always be at the mercy of the client's decision-making process, which at times can be emotionally driven, and the result will likely be an unhappy client and an unhappy advisor. Advisors to Accumulators need to also demonstrate the impact that financial decisions have on the client's family members, lifestyle, and family legacy. If you can demonstrate to the Accumulator that you have the ability help him or her make sound long-term decisions, you will likely see your Accumulator fall into step and be easier to advise.
In January's article I will begin a new series called "Deep Dives Into Behavioral Investor Types." This series will take a more focused look into the biases that drive each BIT and how best to create investment plans that are catered to each BIT.