Post ‘R’ day, along with the inevitable distribution turbulence that will afflict business models, there is no doubt that one of the biggest challenges to the retail investment adviser (RIA): client relationship is clients will only give RIAs 30-40 minutes in their engagement meetings to convey the value for fee based advice and the fact that savvy clients will orphan themselves 2-3 years into a fee based relationship if they do not perceive service value.

Gaining the right people in the right position with the right skill set is just as crucial for advisories as is deciding on a restricted or independent distribution model.

Behaviour in any industry is unfortunately an elephant in the boardroom. When faced with enforced change and challenges we tend to get caught up in the hard facts and ‘serious business’ issues. Yet it is people who build business, people who work for business, people who regulate business and people who buy from business. Behavioural biases come with this territory, i.e. the current financial crises cause is down to a mix of dysfunctional behaviour and irrational reaction. Cause and effect then.

So what can be done about this? Well the first point is to recognise and understand behavioural economics and how it applies to financial services. The human mind is a wonderful tool, yet it does have its downside. Notable social scientists such as Daniel Kahnman, Amos Tversky and Richard Thaler have popularised the view that the human mind is fallible particularly when it comes to financial services. This can then help financial advisers identify the most effective and useful behaviours to build trusted client relationships.

Clients will need to understand quickly how their mind reacts to market movements and their capacity for and reaction to risk or loss. The brain effectively is hard wired to loose, it operates a faulty traffic light system: we invest when we should stay out and withdraw when we should stay in. Neuroscientists know that its dopamine that flows when we’re on a bull-run and adrenaline when the bears come chasing. A classic fight or flight response.

Indeed loss and regret aversion are two of the most devastating biases that need to be addressed. By ensuring they complete thorough client driven questioning at the fact finding stage and facilitating an open and comfortable environment where clients feel safe to offer information around their past experiences, risk tolerance and attitude, advisers will then be able to gain valuable information to include in their portfolio recommendations to ensure a personalised approach that will offer ‘safety stops’ so clients do not make the same mistakes over and over again.

For example it maybe better to stay invested when a paper-loss is made through a market crash than to cut and run. Encouraging client behavioural strategies such as a sleeping on decisions; a counter-intuitive approach, avoiding too much market information and ‘noise’ or spreading options through product choice and diversification can all facilitate favourable results in the long term.

Indeed advisers now really have to ‘walk their talk’ and ensure long-term goals are the focus and rules of thumb (or heuristic decision making) is avoided on both their and their clients part. This behavioural shift may seem basic, but it has been scarcely applied. Unfortunately the world is much the poorer for the myopic, overconfident behaviour that brought such financial devastation with it.

So by fine tuning their own behaviour, gaining awareness of behavioural economics principles, applying them to positively influence clients biases and encourage a healthy relationship with their finances, advisers can certainly add high value and ensure clients realise the worth of retaining their services.

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