Why 40% of Clients Say an Advisor’s Value is Emotional Support

Money is emotional for everyone, and watching the volatility of the market can be both exhilarating and hard to watch for your clients. In fact, those emotions and psychological makeup play a big role in how investors make decisions and how they perceive your value and relationship. 

A recent Vanguard study found that clients believe 40% of their advisor’s value comes from the emotional support they provide—as opposed to portfolio returns or other financial gains.

An advisor can serve as a crucial sounding board, voice of reason, and unbiased expert when it comes to making informed investment decisions. Your challenge, however, is helping current and prospective clients understand these benefits. 

In this blog, we’ll take a look at investor psychology and the strategies you can use to address client reactions to market changes.

How Investor Psychology Impacts Financial Decision-Making

Psychology is prevalent in financial decision-making, thanks to a few common emotional or behavioral biases. Investors are humans, after all, and that means they’re going to make decisions based on their past experiences or expectations for the future. 

As an advisor, you need to acknowledge the potential biases at play, educate your clients on them, and help them make decisions that ultimately support their long-term goals and tolerance for risk.

Some common biases include:

• Loss aversion: Some people have such a strong emotional reaction to losing money or seeing their portfolio drop in value, that it outweighs the satisfaction they feel when gaining money. This emotional response to losing money may make them naturally averse to risk—though it can also persuade them to pursue larger gambles (think high-risk, high-potential-reward investments).

• Confirmation bias: People naturally seek out information that supports their existing beliefs. If your client is interested in investing in a certain company, they may seek out articles or data that support their decision while ignoring sources that may contradict their beliefs.

• Hindsight bias: There’s no way to know what the markets will do, but people who have experienced success in the past will sometimes assume they can accurately predict the future. Rather than take hindsight knowledge for what it is, they’re convinced they knew all along what the outcome would be—and they can accurately predict it again.

• Herd mentality: You’ve likely heard of the phrase “herd mentality” in other contexts, but it’s something that often impacts the markets as well. If an investor hears that lots of other investors are doing something (like buying or selling a certain stock), they may be more inclined to do the same—even if it goes against their investment strategy.

Tailoring Your Advice to Address Investor Behavior

As an advisor, it’s your job to account for the psychology that goes into your client’s decision-making, so you can help them stay on track with their goals and be comfortable with regular market movements.

The key to addressing investor behavior is to communicate effectively and personally with your clients and prospects.

Make sure your clients know you’re accessible and available to discuss their concerns. Encourage them to reach out anytime they feel compelled to make an impulsive or emotional decision about their money. Being proactive with your communication better ensures your clients feel supported and cared for from an emotional perspective, which, as we discussed earlier, increases your perceived value as their financial partner.

If you haven’t already, consider creating a clear, scalable communication strategy that ensures you’re providing personalized attention to every client (without taking too much time away from other important tasks).

3 Strategies for Managing Client Reactions to Market Changes

As you work to enhance your existing client relationships with more effective communication, you may find it helpful to leverage AI-driven tech tools and platforms. Here are three strategies for managing client reactions to market changes, which you can accomplish with the help of Nitrogen’s client engagement tools.

Strategy #1: Check-in Regularly
How will you know how your clients are feeling about the markets unless you ask? Investor sentiment is incredibly important to understand, and on a larger scale, it has the power to move markets.

Nitrogen’s automated Check-ins ask your clients two simple questions, which you can use to tailor your messaging and prioritize your additional communications:

• How are you feeling about the markets?
• How are you feeling about your financial future?

In seconds, your clients can share critical data about their emotional well-being as it pertains to their portfolio, so you can better serve as a trusted guide and leader.

Strategy #2: Help Them Understand “What If”
By visualizing how different financial decisions might impact future outcomes, you can engage your clients in a more meaningful and impactful way. Nitrogen’s custom scenarios enable you to combine up to five key factors (proposals, indexes, blended benchmarks, individual stocks, and funds) to help your clients understand what will happen based on their financial decisions today.

Strategy #3: Use Historical Events to Stress Test Their Strategies
Did your clients experience major portfolio changes during the 2008 global financial crisis? Considering it was over 15 years ago, it’s possible your clients haven’t been through a major market event of that magnitude—or they may have forgotten just how stressful the whole situation can be.

With Stress Tests, you can run individual portfolios through historical events to illustrate those hypotheticals in a way clients understand. By proactively addressing concerns, you also empower clients to make informed decisions while managing their expectations.

Create More Effective Client Engagement with Nitrogen

Your clients are humans too, and that means they’re susceptible to emotional biases and investor psychology. As their advisor, it’s your job to help them navigate the ups and downs of the markets using research and discipline—while avoiding gut reactions and short-sighted decision-making.

Nitrogen’s client engagement tools can help you keep the lines of communication open and proactively gauge your clients’ concerns, so you can tailor your relationship to address their needs more effectively. Schedule your free demo of Nitrogen today to learn more.