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Dealing With 'The Preserver' Client

Preservers place a great deal of emphasis on financial security and preserving wealth rather than taking the necessary risks to grow it.

Michael M. Pompian, 09/19/2013

This month's article is the ninth 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.

In the last article, I explained improvements and updates to the BITs theory. Similar to the psychological typing theories that I covered in earlier articles, BITs are models for various types of investors. There are four behavioral investor types: the Preserver, the Follower, the Independent, and the Accumulator. Each of these types will be reviewed in detail starting with today's article, which will cover the Preserver BIT.

Preserver Behavioral Investor Type
A Preserver BIT describes an investor who places a great deal of emphasis on financial security and preserving wealth rather than taking risks to grow wealth. Such investors are guardians of their assets and take losses very seriously. Preservers are often deliberate in their decisions and sometimes have difficulty taking action with their investments, out of concern that they may make the wrong decision. They instead may prefer to avoid risk and stick to the status quo.

Preservers often obsess over short-term performance (in both up and down markets--but mostly down markets) and losses, and they also tend to worry about losing what they had previously gained. This behavior is consistent with how Preservers have approached their work and personal lives--in a deliberate and cautious way.

It is not uncommon to find older investors behaving in a way consistent with the Preserver BIT. This is natural. As we age, the certainty of cash flow becomes paramount. As such, it is common to find Preservers focusing their wealth on taking care of their family members and future generations, especially funding life-enhancing experiences such as education and home buying. Because the focus is on financial security, Preserver biases tend to be dominated by emotion--relating to how they feel--rather than focusing on cognitive aspects--how they think.

Additionally, wealth level may influence Preserver behavior. Although not always the case, many Preservers that have gained wealth want to preserve it and change their attitude toward risk. This is especially true when an investor has been through a crisis that threatened his or her wealth (like in 2008 when equities dropped 37%). They may be obsessed with preserving assets and demonstrate (sometimes) excessively conservative behaviors, similar to those associated with loss aversion, status quo, and endowment biases. Preservers can also display certain cognitive biases that relate to the same orientation, namely anchoring and mental accounting biases.

Upside and Downside to Preservers
There are certain benefits that accrue to Preserver BITs. Since Preservers are focused on preserving capital and avoiding losses, they take a somewhat conservative approach to investing. This can be a benefit in terms of lowering volatility in a portfolio, which can lead to better long-term compounded returns.

Additionally, Preservers who practice savings behaviors through mental accounting (i.e., saving for retirement, for college funding, for paying bills) can accumulate long-term wealth as long as they are careful to invest in a balanced way across these various mental accounts. Preservers are also typically less likely to engage in excessive trading activity, which has been shown to be detrimental to wealth accumulation. Taking a more deliberate approach to investing may also help Preservers stick to a long-term plan.

The downside of the Preserver BIT has mainly to do with an excessive focus on avoiding losses. Some Preservers have been known to panic during market meltdowns such as in 2000–2001 and 2008–2009 and sell out after suffering losses, only to see markets rebound in the ensuing 12 to 24 months.

It is also important to note that Preservers may sell their winning investments too quickly in an effort to protect gains, which can also inhibit long-term financial success. Additionally, excessive mental accounting can lead to suboptimal portfolio construction if too much cash is held across various mental accounts.

Another caveat for the Preserver BIT is an overemphasis on taking a low-risk approach to investment planning in general. For example, if Preserver BITs focus too many of their investments on cash and bonds, they may risk not reaching their financial goals if those goals call for a portfolio return between 5% and 10%, or higher. Cash and bonds simply won't get you there. Additionally, Preserver BITs' biases are mainly emotional, which are hard to change or moderate, especially during market upheavals. During these times, investors should consider making risky investments as opposed to selling risky investments. This is counterintuitive, especially in the heat of the moment when markets are crashing, but in almost every case, it is the right decision to step into risky asset markets when there is "blood in the streets."

Advice for Preservers
After reading the above, you might conclude that Preservers are difficult to advise because they are driven mainly by the avoidance of losses, which is an emotional response to fluctuations in the value of their portfolios. But statistics have shown that long-term investments in equities, which are clearly the most volatile investment one can own, have been handsomely rewarded. Therefore, an investor's control over behavior--specifically related to not selling at the wrong time and rebalancing at the right time--is what makes the difference in reaching financial goals.

To best serve their Preserver clients, advisors should take the time to interpret the behavioral signs provided to them. Preservers need big-picture advice, and often they require behavioral coaching as opposed to strict financial or investing education. For example, advisors would probably be more effective in advising Preserver clients if they avoided dwelling on details such as standard deviations and Sharpe ratios, especially during times of market upheaval; otherwise, they risk losing the client's attention.

Preservers also need to understand how the portfolio they choose to create will deliver desired results to emotional issues such as the needs of family members or future generations. Once they feel comfortable discussing these important emotional issues with their advisors, and a bond of trust is established, they will be ready to take action. After a period of time, Preservers are likely to become an advisor's best clients, because they value greatly the advisor's professionalism, expertise, and objectivity in helping them make the right investment decisions.

Conclusion
Hopefully this article has helped you to better understand the Preserver BIT. In the next article, I will describe the Follower BIT. The Independent and the Accumulator will be covered in subsequent months.

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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