- Knowing your client’s relationship with money will help you create a better strategy.
- Behaviors and emotions can lead clients to make poor decisions.
- A risk assessment provides powerful insight into your client’s investment approach.
How well do you know your clients? When you first bring them on board, do you ask about their relationship with money? As a financial professional, you’re embarking on a journey with them to and through retirement. Having some background information such as their level of financial literacy, how they manage their personal finances, and how much risk they are willing to take with their investments will help you develop a strategy that will make them feel confident, comfortable, and help them to work toward achieving their goals.
In the economics world, experts are increasingly studying the psychology of human behavior to the end of better understanding why people make certain choices around money. They are discovering that often subconscious, reactive, and irrational thought processes lead people to bad decisions with finances. And those people may not even be aware of it.
So what are these key psychological influencers on financial decisions?
As you probably know, emotions play a powerful role in people’s attitudes and reactions toward money. From excitement to panic, investing in the stock market can be an emotional roller-coaster ride. Barclays did an excellent job of mapping out the investment sentiment cycle,1 as illustrated below. Watch for these emotions in your clients and help them keep their eye on long-term goals rather than short-term gains and losses.
You may already have a questionnaire you have new clients fill out to determine their risk tolerance. If you don’t, you might want to consider creating one to help you to better understand how your client may react to swings in the market and how much they’re willing to accept to reach their long term goals. Here are some definitions to help you know where clients fall on the risk tolerance spectrum.
Aggressive: These investors understand the volatility of the stock market and are able to keep their eye on the prize that may be years into the future. They’re willing to take on high levels of risk in equities for maximum gain. They may be younger investors with more time to recover from losses before they reach retirement.
Moderate: These investors are willing to accept some risk but want to balance it out with safer investments. They may lean towards a 50/50 approach of stocks paired with bonds. These investors may be middle-age and aware they’ll have less time to recover from big losses before they reach retirement.
Conservative: These investors would rather just keep what they have than take a risk of losing it in order to grow it. They may have suffered a major loss in the last recession and never recovered financially or emotionally. They’re likely closer to retirement age and don’t want to put their nest egg at risk. Investments usually fall into small growth, safe options such as CDs and money market accounts.
Taking the time to get to know your clients will allow you to develop a customized strategy for them, build strong relationships, and help them to pursue peace of mind and the quality of life they deserve in the years leading up to and during retirement.
1 “Cycle of investor emotions,” Barclays, accessed February 2019.
Things to Consider:
- Take time to get to know your client’s relationship with money.
- Be aware of red flags with client behaviors and emotions.
- Have a questionnaire to help determine your client’s risk tolerance.
Investing involves risks, including loss of principal, and there is no guarantee of profits. Investors should carefully consider their objectives, risk tolerance, and time horizon before investing. There is no assurance that any fund will meet its stated objective.
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, tax, legal or financial advice or guidance. Please consult your personal independent advisors for answers to your specific questions.