Brains trust
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Brains trust


Behavioural psychology and emotional intelligence have never been more important to financial planners’ bottom lines.

IF YOU’VE ever had a haircut, or had just that one barista making your coffee every morning, you’ll understand that observation of American writer John Steinbeck: “People tell a hairdresser things they wouldn’t dare confess to a priest.”

Once the realm of the local barber, the same psychological concept is moving into financial advice. Future of Financial Advice (FOFA) regulations that remove commissions and ensure advisers act in their clients’

“best interests” are placing relationships front and centre both for consumers and planners.

Research outlined in the Association of Financial Advisers’ (AFA’s) The Trusted Adviser white paper, produced in conjunction with evidence-based business consultants the Beddoes Institute, found 82 per cent of surveyed clients say interpersonal skills rated highest on their wish list
for advisers.

“A trusted adviser has really outstanding technical expertise,” the Beddoes Institute’s Dr Rebecca Sheils, who conducted the study, says. “It’s almost what we call a hygiene factor: it’s a basic expectation that consumers have and it’s the reason they’re paying for advice, so they have to perform well on the technical aspects.

“What was the real eye-opener for us was the other side of the coin, the interpersonal skills which are underpinned by one’s emotional intelligence (EI).”

While EI might be a buzzword within the industry, psychological concepts are being used in finance in a range of ways: to segment clients, to aid in engagement and to explain anomalies in market theories.

With FOFA put to bed, there is no better time for advisers to look at their value propositions to see whether psychology might help them delve a little deeper.

Why now?

Dr Mark Brimble, a Griffith University associate professor (finance), says psychology’s relatively recent entry into financial services can be explained simply: the industry is still evolving.

“The financial planning industry as a profession is relatively new, so unlike other fields – like accounting, medicine and law, that have been around for hundreds of years – we haven’t had the benefits of that timeframe to develop ... a detailed understanding of how that advice interacts with a client,” Dr Brimble says.

“It has moved from a sales-based environment to an advice-type environment where it is more incumbent on the adviser to understand the issues to do with that client – their goals, their beliefs and indeed, other things that will naturally introduce biases in the behaviour of the individuals.”

Dr Sheils says the coming together of psychology and financial advice reflects the evolution of the consumer in general. With clients now having the freedom to “shop around”, it is more important than ever to construct a relationship with the client based on more than just technical expertise.

Infocus Wealth Management’s chief executive, Rod Bristow, says he thinks ‘soft skills’ have always been linked to advice, but it’s more a case of growing awareness as a result of FOFA.

“I think there is always a base level of knowledge and awareness about this particular issue, but I think there is a real focus on this at the moment,” Mr Bristow says.

“I think the reason for that is that FOFA is causing a lot of change in the industry – which I think is really healthy – and a lot of that is about making sure the client is the centre of everything that is taking place. That’s what our industry is all about, isn’t it? It’s servicing clients.”

Emotional intelligence

According to Sue Langley, founder of the Langley Group, which specialises in EI tools, emotions are inherently tied up with money.
EI or “the intelligent use of emotions” can help advisers better understand clients.

“We are emotional and social creatures and our brain is actually designed to resonate with emotions,” Ms Langley says. “Therefore, the better we get at using them intelligently, the better we’ll be at our relationships and our performance.”

Pointing to her research for The Trusted Adviser, Dr Sheils says that of the 82 per cent of clients who valued interpersonal skills most highly in their adviser, 38 per cent said communication was the most important interpersonal skill, followed by building rapport at 24 per cent.

“For advisers who want to build on and become more trusted by their clients, it’s really about developing your level of EI,” Dr Sheils says. “You’ve got your IQ, which is more about your cognitive abilities and you can’t really change it, it’s fixed,” she explains.

“The thing about EI is it can be improved with the right type of training and development.”

However, there appears to be a disconnect between the level of interpersonal skills valued by clients and advisers’ own perceptions of their EI level.

A reader poll conducted by ifa found that when advisers were asked which qualities their clients valued most, 56.6 per cent nominated interpersonal skills.

But 19.4 per cent still placed achieving investment returns above professional reputation and technical skills and knowledge.

Dr Brimble and Katherine Hunt, a financial planner with Aspire Financial Planning and PhD student, reached a similar conclusion in their study, Determinants of Client-Professional Relationship quality in the Financial Planning Setting.
The study found that while “trust” was critical in a client/adviser relationship, financial planners tended to overestimate their client’s level of trust and commitments.

“The discrepancy was really interesting because it means that clients and planners are to some extent on different wavelengths,” Ms Hunt says.

“I think, importantly, the advice industry does really seem to be about products and strategies and from the research it seems that clients are seeing it as much more than that – that it’s not just a financial solution.”

The science behind emotion

Ms Langley says that even when people think they are making rational decisions, there is still an emotional core in their thinking.
Emotional thought is automatic and often described as “subconscious” because it feels like an instinct, whereas rational thought is more deliberate, she says.

“The thing that we sometimes fail to realise is that, because of the automatic nature of the emotional part of the brain, it is more powerful than rational thought,” she explains.

 “What often happens is … when people think they’re being rational, their limbic brain – their emotional centre – is actually being more active first, so they’re still getting that instinctual bit, it’s just backed by rational thought.

“If you think about financial services and you think about money in general, people have a lot of emotion tied up in money.”

Ms Langley developed the EI Advisor Program to help advisers gauge their own EI and learn to work to the emotions of others, stressing that EI as opposed to an IQ can be improved.

“If you can read the micro expressions that occur in people, it gives you data [with which] you can then make different choices,” she says.

“If I’m with you and I don’t notice a flicker of concern go across your face, I’m just going to keep plugging away at what I’m saying, whereas if I can see that, it gives data and I can then make a different choice on how I continue that conversation.”

According to Ms Langley, EI can also help emotional management, which in turn can help planners deal with customers who might be in an agitated state if markets are not behaving as they would like.

Different emotional states can also be used by advisers in different ways, she adds, with positive emotions conducive to ‘big picture’ work and neutral or slightly negative emotions better for detailed processing.

“If you were my client and you were in an angry state, me sitting down and explaining the company policy is not going to help you. I have to deal with your anger before we can get to the technical and rational element,” she says.

“As an adviser… what you need to think about is the emotional state you need to be in when you’re dealing with a costumer versus the emotional state that is perhaps going to be more conductive to ... working out the detail of their portfolio.”

Getting to know you

Just as EI helps build a relationship between planner and client, so psychological testing is being used by advisers to better understand clients and to tailor their offering.

 Paul Resnik and business partner Geoff Davey started developing their risk-profiling system FinaMetrica in 1994 when they realised there was a niche in the market.

“One of the things we were conscious of was that the soft side of financial advising really hadn’t ever developed, so we were interested in helping advisers better understand their clients,” Mr Resnik says.

Robert Skinner, co-founder of financial education and engagement services provider Innergi, says his business partner, Matt Linnert, designed their psychometric test, Money Personality, similarly to increase engagement.

Based on the Myers-Briggs and DSIC psychology tests, Money Personality is designed to help an adviser better understand how a client views money so they can tailor their communication and the portfolio to their needs.

“It’s really simple to use and it allows the adviser to go as deep as they want in understanding the driver behind their client,” Mr Skinner says.

“Just the understanding of what makes your client tick will benefit the relationships because the risk for planners is even if a client comes on board, they might not be fully engaged – they’re just existing.”

Stephen Smith, psychological services director of profiling and consultancy firm Prova Profiling, agrees that effective communication is the key to advice. It was the impetus for the creation of Prova’s profiling system and its Understanding Client Psychology course, he adds.

“We did a lot of research on the connections between the advisers and the client and what we found was that different types of people wanted different things out of their advisers and that there are basically four different types of personalities,” Mr Smith says.

“There is the strong, results-orientated person – the ‘I want it now’ type of person. Then you’ve got the friendly person – those people who like people. Then you’ve got the steady, loyal harmonious type of person and then, finally, the very correct, accurate, detailed type of person.

“People also feel more comfortable more quickly with the person who is similar to them.”
The Money Personality system also places clients in one of four Money Personality categories, which are given animal names: monkey, labrador, dolphin or owl.

Mr Skinner says that most people have all the animals in them, but they tend to have two stronger preferences.

By uncovering which preferences the client has, Mr Skinner says an adviser is better able to engage and to provide advice that suits their needs.

“If you’re a labrador, you will probably lose sleep at night if you invest in a hedge fund that’s been around for six months,” Mr Skinner says.
“If you’re a monkey on the other hand, 10 conservative managed funds that you drip feed into for the next 20 years will equally keep them awake, so it’s about knowing the client.

“However, the advice may not change and that’s what we try to highlight to advisers – that you don’t need to change that person’s animal necessarily – but you might change the way you talk about it.”

Prova’s course, according to Mr Smith, allows the adviser to pick up on what kind of personality they are and then how to interact with clients.

Once an adviser learns to recognise the types of personality in people, they will start to pick up indications of who exactly they are dealing with – even before they meet them face to face.

“Through email you can pick up the different types of personality as well. So as they walk into a client meeting, the adviser should be psychologically prepared to interact with the client more effectively,” Mr Smith says.

“The psychology of clients permeates the relationship from start to finish. So the planner goes away and does a plan, and even the way they present the plan to their client is an area that can be improved by understanding who they are.”

Other risk profiles, not based on psychometrics, typically ask clients four questions around risk tolerance, time horizon, risk aversion and investment knowledge, says Mr Resnik. FinaMetrica is different as it focuses in depth on risk tolerance, with the assumption that the advisers will work out the other three with the client to craft a plan.

“We provide the basis for an evidence-based, robust, scientific approach where the clients, the advisers and the eventual beneficiary – the fund manager – all gain benefit,” Mr Resnik says.

“It’s very human: it’s full of collaboration and discussion and it is the client that owns the decision.”

In the herd

While psychometric tests aim to look at the individual, behavioural economics explains market anomalies by studying the generalist behaviour of all investors.

Dr Brimble says the field “tries to look at how people’s beliefs, behaviours and processes introduce bias in terms of their ability to make financial decisions”.

A common behavioural bias is over-confidence, where people overestimate their own abilities and knowledge.

“Another is loss aversion. If you present two options to a client, one framed negatively and one framed positively but with the same financial outcome, they’ll always go for the positively framed alternative,” Dr Brimble says.

“There is also a range of things like confirmation bias, where people are more likely to look for information or advice that supports their thoughts, feelings or ideas even though it logically contradicts the actual position.”

McPhail HLG Financial Planning’s managing director, Anne Graham, says that at her practice, she sees behavioural finance concepts filter through the advice process.

“When you’re dealing with clients, you can anticipate their reaction to certain pieces of information. So, for example, if a portfolio has fallen in value, the client is more upset or shocked and takes it harder than if the portfolio had risen in value by a similar amount,” Ms Graham says.

 “The thrill of the gain is only about half as much as the despondency of a loss.”

Dr Brimble agrees that it is important for advisers to properly understand how behavioural economics can impact client decisions as well as their own biases.

“If one encounters a client with these biases and is not aware of the theory, clearly that then undermines their ability to have a productive professional client relationship with those individuals,” he says.
“What we’re saying is that part of the training should be able to pick up on some of these theories and strategies.”

Set in stone

The Australian Securities and Investments Commission (ASIC) recently released Consultation Paper 212 on RG146 which included a requirement that advisers be “aware of potential behavioural biases (both in themselves and in their clients)”, indicating an acknowledgement that psychology raises issues in the advice process.

Dr Brimble says that while this is a good start, he questions the depth in which it can be covered under RG146.

“I think when you’re talking at the lower end of the minimum standards, then a lot of these higher order skills, like behavioural finance, naturally can’t be covered in a three-week training course where you’ve also got to cover the basis of finance,” Dr Brimble says.

“Of course, that will only pick up the new entrants rather than the existing industry advisers who are already out there.”

Ms Hunt received her psychology degree before she did her studies in financial planning. However, she thought she would have to disregard it as “something that was really great for myself but not something that was going to be strategically helpful in my career”.

It wasn’t until after her job interview with Aspire Financial Planning that her boss told her the study had secured her the position because he recognised its importance.

“I did a degree instead of the RG146 but there is no psychological training there at all, whereas it just seems like the clients actually want more of the psychological and soft skills,” Ms Hunt says.

KR Securities SMSF specialist adviser Nathan Baker, who has a degree in psychology, says that while the discipline forms a pivotal part of his advice offering, he doesn’t think it should be an educational requirement.

“Financial planning, I would say, is about six or seven parts psychology because it’s a very emotional subject generally,” Mr Baker says.

“If we just look back through recent history to the GFC, having a certain level of EI helped you to understand where the client was coming from and to empathize with them.

“I think it has helped me in a whole range of ways that I can’t even verbalise, but do I think an adviser needs a degree in psychology? No, that would be overkill.”

Dave Walters, who owns Triumph Financial Planning, says that while education might help on the periphery, soft skills are best learnt through experience.

“You can’t sort of say, these people are in this group so my psychology training tells me this is how I talk to them,” Mr Walters says. “A good awareness isn’t a bad thing, but trying to dictate a certain behavioural pattern through training I think is counterproductive, and anyone who goes along that line will find they’ll have hits and misses.

“Formal training may narrow people’s thought patterns, particularly younger people. It’s a life journey skill, I suppose, and I think the big words are ‘empathy’ and ‘communication’.”

Infocus’ Mr Bristow says that in order to train his advisers in soft skills, his dealer group runs professional development days that include skills for improving client engagement.

“My personal view is that soft skills are compulsory training for anyone who wants to manage people,” Mr Bristow says.

“I actually think the whole role of soft skills should probably be emphasised more and that’s [all industries] – it’s not exclusive to financial advice.

“The advice process is about trust and if an adviser understands themselves and therefore can recognise and understand some of the challenges a client is facing, then that trust is going to be built a lot quicker.”

The future

Mr Skinner says that while Money Personality is doing very well, take-up is still slower than was expected.

“Matt and I have thought, well, do advisers think they need to go and do a degree in EI or psychology? Do they not want to talk about that kind of stuff?”

After all, Mr Skinner himself initially had his own reservations.

“I thought it was ‘fluffy’ and a bit ‘touchy-feely’ because I didn’t know the power behind it,” he says. “It’s basically giving the adviser a tool to understand the driver behind their client and to have a bit of fun with it as well.”

Ms Hunt says she sees the industry moving towards involving psychological concepts in advice but that the male-dominated demographics of the industry might make that process difficult

“I don’t like stereotypes, but trying to get people who have been established in financial planning to suddenly start talking to their clients about feelings and things that aren’t financially-related is going to take some time,” she says.

Personal Asset Services director and principal Philip Carman agreed that advisers need more of a service offering than one that comprises purely technical skills if they are to maintain clients during tough markets.

“If you’re an investor and I am telling you how good I am at ‘picking winners’, the minute I fail to do so, you’ll leave because that’s why you came to me,” he says.

“That is really what needs to be said about EI, rather than the usual psychobabble – it’s about being transparent, it’s about empathy and it’s about being honest.”

Mr Carman started in financial planning after working in the service industry and to that he credits his ability to build a relationship with his clients.

“I was a very good waiter and I loved serving people and making them feel comfortable and special,” he says.

“That service industry ethic that I had… doing that well and having the right mentality... has translated into becoming a very good investment adviser because I’ve also got the necessary numeracy and literary skills to go with it.”

Ms Graham agrees: “If you can build a relationship with them, they’ll be more at ease and relaxed and they’ll provide you more information about themselves and what they’re worried about.

“They’ll be some kind of a commitment on their part to being involved in the whole process because they’ll feel connected to it,” she says.

“I’ll state the obvious: you’re dealing with people, not just their money.” «

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