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How Diagnose an Overconfident Accumulator Client Type

Since these clients are successful in business or other pursuits, they often assume they'll be successful investors.

Michael M. Pompian, 11/20/2014

This month's article is the 11th 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 (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 Accumulator 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 Accumulator 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; so 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 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 Accumulator BIT
As a refresher, an Accumulator describes investors who are interested in accumulating wealth and are confident they can do so. These BITs have typically been successful in some business pursuit and also believe they will 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 are firm believers 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. Since 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 the investing process. They may discount the fact that investing outcomes are often random and full of unknown risks.

Accumulators can also let their spending get out of control at times due to the "wealth effect" of having created assets. This can lead to lifestyles that are more extravagant than prudent. Accumulators also may make investments based on how opportunities resonate with their personal affiliations or values.

Accumulator biases tend to be emotional--relating to how people feel--rather than focusing on rational aspects--relating to how they think. The biases of the Accumulator BIT are Overconfidence, Illusion of Control, Affinity, Self-Control, and Outcome. In the next article, we will discuss these biases and also have an in-depth review of the biases that dominate the Accumulator 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.

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