Use this test as a learning tool to understand the characteristics of each type: the Preserver, the Follower, the Independent, and the Accumulator.
Welcome to 2014! This month's article is the first in a new series called "Deep Dives into Behavioral Investor Types." This series, building on the last one from 2013, is intended to help advisors create better relationships with their clients by deeply understanding their financial personalities and then being able to adjust their advisory approach to each type of client.
As we learned in the 2013 series, there are four behavioral investor types (BITs): the Preserver, the Follower, the Independent, andthe Accumulator. Under the assumption that readers have at least a basic understanding of each BIT, we will now turn our attention to a deeper understanding of BITs to include how best to create a portfolio for each one.
As we learned previously, 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 they lack an understanding of what is truly important to the client and how to communicate and interact in a way that is meaningful and effective.
Organization of This Series
The first step to more deeply understanding each BIT is to know what questions to ask to diagnose each type. I will provide a diagnostic test, along with the answers, for readers to use for themselves and/or with their clients. This test is a useful learning tool not only to understand the characteristics of each type but also to potentially use in practice. You can either give the test directly to the client or weave the line of questioning embedded in the test into a discussion with the client. I have provided the test in this article for you to review and will provide an answer key in next month's article.
The secret to more deeply understanding BITs is to understand the biases associated with each one. I have discovered over the years that with each BIT, several biases dominate decision-making behavior. Once you understand which biases dominate, you have a much deeper understanding of how to diagnose and treat each BIT. The final step in the process is to design and implement a portfolio for each BIT. This is, of course, a subjective process--and I cannot give specific investment ideas--but I will give some guidelines based on risky versus risk-reduction assets for each BIT, and you will see how these guidelines change from one BIT to the next.
In summary, the process we will use for a deep dive on each BIT will be as follows:
--Each BIT will be reviewed in a three part series (for a total of 12 articles).
--Part I will be a diagnosis of each BIT and discussion of the general characteristics of each BIT.
--Part II will be a deep dive into the biases of each BIT.
--Part III will be how to create a portfolio for each BIT.
As noted, each three-part mini-series will begin with a discussion of how to diagnose each BIT. The following questionnaire will be discussed and reviewed to help readers understand how to initially diagnose the orientation for each investor type.