• / Free eNewsletters & Magazine
  • / My Account
Home>Practice Management>Practice Builder>How to Deal with the Independent Client

Related Content

  1. Videos
  2. Articles
  1. Despite Recent Compromise, No Long-Term Tax Certainty

    Investors still need to plan for long-term tax hikes and keep AMT exposure, itemized deduction limitations, charitable distribution opportunities, and trust taxation on their radars, says Investor Solutions' John Pitlosh.

  2. Don't Make These Tax Mistakes

    Inefficient contributions and withdrawals and poorly timed asset purchases are among the many common tax-related blunders, but Morningstar's Christine Benz offers solutions to avoid such pitfalls.

  3. Contrarian Approach to Growth Pays Off

    Morningstar 2012 International-Stock Fund Manager of the Year Rajiv Jain expects continued earnings growth for the less popular growth stories of tobacco and Indian consumer stocks .

  4. 5 Tax-Planning Tips for Retirees

    Morningstar's Christine Benz offers hints for how retirees should approach taxes in regard to portfolio withdrawals, RMD reinvestments, property, health care, and estate planning.

How to Deal with the Independent Client

Independent-minded clients like to get involved in the investment process but are prone to certain cognitive biases that can torpedo their ability to reach their goals.

Michael M. Pompian, 08/21/2014

This month's article is the eighth in a series called "Deep Dives into Behavioral Investor Types." This series is intended to help advisors create better relationships with their clients by deeply understanding the type of person they are dealing with from a financial perspective and being able to adjust their advisory approach to each type of client.

As we learned in the last series, there are four behavioral investor types, or BITs: the Preserver, the Follower, the Independent, and the Accumulator. As noted in previous articles, the learning process for each BIT will be a series of three articles:

1. Part I will be a diagnosis of each BIT and discussion of its general characteristics.

2. Part II will be a deep dive into the biases of each BIT.

3. Part III will be how to create a portfolio for each BIT.

This article is Part I of the Independent BIT.

BIT Orientation Quiz
I am often asked how to diagnose what category of investor a client falls into. The following is a helpful way to initially identify an investor type.

I have highlighted in bold below the responses that identify the Independent Behavioral Investor Type.

1. My main role in managing my money is:

--a. To be the guardian of my wealth by not making risky investments.
--b. Actively trading my account to accumulate wealth.
--c. Doing research before investment decisions.
--d. Listening to others for advice on managing money.

2. When it comes to financial matters, I most agree with which statement?

--a. Losing money is the worst possible outcome.
--b. I should act quickly on opportunities to make money.
--c. I need to be satisfied I have taken the time to understand an investment I plan to make even if I miss opportunities by doing so.
--d. I should not be in charge of overseeing my money.

3. When deciding on an investment, I trust the advice of:

--a. My own self-discipline.
--b. My gut instincts.
--c. My own research.
--d. Someone other than myself.

4. When markets are going up, I am:

--a. Relieved.
--b. Excited.
--c. Calm and rational.
--d. Glad I am following someone's advice.

5. In the financial realm, which word best describes you?

--a. Guardian.
--b. Trader.
--c. Researcher.
--d. Advice-taker.

6. When it comes to following a plan to manage money, which best describes your thinking?

--a. If following a plan will help safeguard my assets, I will do it.
--b. Following a plan is not that important.
--c. A plan is good, but investment decisions must include my thinking.
--d. I tend to follow others' advice. If a plan is recommended to me, I will follow it or I will just listen to others' ideas.

7. I feel most confident about my money when:

--a. I can sleep at night knowing my assets are safely invested.                    
--b. I am invested in assets that have high appreciation potential.
--c. I make my own investment decisions or at least have input into the process.
--d. I'm invested in things that many others are invested in.

8. When a friend suggests a "sure thing" investment idea, my response normally is:

--a. I typically avoid these types of ideas.
--b. I love things like this, and I can take action right away if needed.
--c. I will do my own research and then decide what to do.
--d. I will need to consult someone else before making a decision.

9. Short-term fluctuations in my portfolio make me:

--a. Panic, thinking about selling.
--b. Sense opportunity, thinking about buying.
--c. Feel in control, potentially doing nothing.
--d. Want to call someone to see how my money is doing.

10. Imagine yourself at a sporting event. Which role are you most likely to play?

--a. A defensive player.
--b. An offensive player.
--c. Strategist/Coach.
--d. Fan.

Characteristics of the Independent BIT
If you have a client with a preponderance of (c) answers, you can feel confident that you need to address the biases of the Independent BIT.

An Independent behavioral investor type describes investors who have original ideas about investing and like to get involved in the investment process. Unlike Followers, they are not disinterested in investing and are quite engaged in the financial markets.

Independents may have unconventional views on investing, and this "contrarian" mindset may cause them not to foresake a long-term investment plan. With that said, many Independents can and do stick to an investment plan to accomplish their financial goals. At their essence, Independents are analytical, critical thinkers who make many of their decisions based on logic and their own gut instinct. They are willing to take risks and act decisively when called upon to do so.

Independents can accomplish tasks when they put their minds to it. They tend to be thinkers and doers, as opposed to followers and dreamers. Unfortunately, some Independents are prone to biases that can torpedo their ability to reach their goals. Their biases tend to be cognitive--relating to how people think--rather than focusing on emotional aspects--relating to how they feel. For instance, they may act too quickly, without learning as much as they can about their investments before making them. They may mistake reading an article in a business news publication for doing original research. In their half-ready, full-on pursuit of profits, they may leave some important stones unturned that could trip them up in the end.

The biases of the Independent BIT are confirmation, availability, self-attribution, conservatism, and representativeness biases. In the next article we will discuss these biases and also have an in-depth review of the biases that dominate the Independent BIT decision-making process.


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

blog comments powered by Disqus
Upcoming Events

©2014 Morningstar Advisor. All right reserved.