How Advisors Can Help Independents and Accumulators Succeed
These two investor types have investing strengths and weaknesses. Here’s how to best advice each.
This is the fourth article in a series focusing on behavioral investor types and intended to help advisors strengthen their relationships with their clients by helping them better understanding clients' financial personalities. Once advisors understand the various investor types at play, they can adjust their advisory approach for each type.
I recently introduced four behavioral investor types. Today we'll take a deeper dive into independents and accumulators, reviewing the "upside" and "downside" of working with these two specific investor types and providing suggestions about how to advise these types of clients.
Advice for Independents
Independents can be difficult clients to advise due to their mindsets, but they are usually grounded enough to listen to sound advice when it is presented in a way that respects their views. As we have learned, independents are firm in their belief in themselves and their decisions and can be blinded to contrary thinking.
As with followers, education is essential to changing the behavior of Independents; their biases are predominantly cognitive. A good approach is to have regular educational discussions during client meetings. This way, the advisor doesn't point out unique or recent failures, but rather educates regularly and can incorporate concepts that he or she feels are appropriate for the client. Education on the benefits of portfolio diversification and sticking to a long-term plan is usually the best course of action. Advisors should challenge their independent clients to reflect on how they make investment decisions and provide data-backed substantiation for recommendations. Offering education in clear, unambiguous ways is an effective approach. If advisors take the time, this steady, educational approach should yield positive results.
Advice for Accumulators
Accumulator clients are often the most difficult clients to advise, particularly those who have experienced losses. Because they like to control or at least get deeply involved in the details of investment decision-making, Accumulators tend to eschew advice that might keep their risk tolerance in check. They are emotionally charged and optimistic that their investments will do well, even if that optimism is irrational. Some Accumulators need to be monitored for excess spending which, when out of control, can inhibit performance of a long-term portfolio. Other accumulators make investments that align with their world view but may not be the best investments for the long term.
For advisors, a reasonable approach to dealing with these clients is to take a leadership role in the situation. If the advisor lets the accumulator client dictate all the terms of the advisory engagement, they will always be at the mercy of the client's decision-making process, which at times can be emotionally driven, and the result will likely be an unhappy client and an unhappy advisor. Advisors to accumulators need to also demonstrate the impact financial decisions have on family members, lifestyle, or legacy. If these advisors can demonstrate to the client that they have the ability help the client make sound long-term decisions, they will likely see their accumulator clients fall into step and be better clients who are easier to advise.
Michael M. Pompian, CFA, CAIA, CFP, is the founder and chief investment officer of Sunpointe Investments, an investment advisor to family offices based in St. Louis, Missouri. His book, Behavioral Finance and Wealth Management, is helping thousands of financial advisors globally build better relationships with their clients. Contact Michael at email@example.com.
The author is a freelance contributor to Morningstar.com. The views expressed in this article may or may not reflect the views of Morningstar.