Defining the 'behavioral investor type' you are dealing with up-front makes it easier to mitigate client behavioral surprises later.
This month's article is the sixth 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.
Background on the Behavioral Investor Type (BIT) Framework
In my last article, we reviewed the history of personality theories. I hope you now have a perspective on this subject that will provide a frame of reference for the next several articles, which are the "meat and potatoes" of this series.
In this article, we will begin to bridge the gap between mainstream personality theories and introduce the theory behind BITs. Similar to the psychological typing theories that we read about earlier, BITs are models for various types of investors.
This framework has four behavioral investor types: the Preserver, the Follower, the Independent, and the Accumulator. Each of these types will be reviewed in detail--in fact, each will have its own article later in this series.
Before jumping into the nuts and bolts of how to diagnose clients into BITs, it is important for readers to understand the background of their creation. In the next section, I will review my original design for behavioral investor types. In next month's article, I will introduce some upgrades and refinements that I have made to the process to increase the usefulness for both advisors and investors. The original design is still quite relevant; however, I have found the updated process easier to describe and implement.