Is Your Client a Modern-Day Sisyphus? 3 Ways to End the Vicious Cycle

Once you’ve built a strong connection and established trust with a client, they are more likely to rely upon you to navigate their financial journey — even when the waters are choppy. In other words, once the trust is there, you’re more likely to be able to coach clients off the ledge in times of financial stress and keep them focused on what really matters, their personal goals and objectives.

Use the “IKEA Effect” to Help Clients Remain Committed

The IKEA effect is a cognitive bias in which consumers place a higher value on products they have partially created. According to Behavioral Economics, “The IKEA effect is particularly relevant today, given the shift from mass production to increasing customization and co-production of value. The effect has a range of possible explanations, such as positive feelings (including feelings of competence) that come with the successful completion of a task, a focus on the product’s positive attributes, and the relationship between effort and liking.”(3)

Here’s how you can use this cognitive bias to your clients’ advantage. Instead of having a client fill out a traditional risk tolerance questionnaire that will “assign” them a standard, off-the-shelf balanced portfolio, collaborating with them to build a personalized asset allocation together may help clients remain far more committed to achieving their long-term goals. Part of the reason is that they were actively involved in the process.

Incorporate “Safety Wheels” Where Needed

Just as the markets go up and down, investors’ appetite for risk goes up and down. Changes in investor behavior are documented by money flows into equities during the late stages of a bull market and out of equities during the late stages of a bear market. In both cases, irrational behavior is driven by fear and greed.

A personalized risk management approach will adjust and adapt to the changing markets based upon the desired outcome or goal of the client. Here are a few suggestions for using personalized risk management to help clients remain on track:

  • „„Use personal benchmarks to help clients stay focused on their needs not just market results. Tie the benchmarks to specific goals the client wishes to fund, such as college for a child or leaving a legacy.
  • Use a segmented bucket strategy to help clients’ segment risk over time. Money that needs to be tapped in the short term should be placed in risk-free asset classes such as cash. Longer term money (needed 15-20 years out) can be placed in higher risk securities such as equities that would have the potential to recover from a market downturn.
  • „„When appropriate, incorporate downside hedging in an effort to protect clients’ downside risk exposure.

By managing client emotions and providing them with simple tools to stay on track, you can add tremendous value to your relationships and your practice. Help clients avoid the unnecessary cycle of stress and anxiety by channeling their attention toward what truly matters to them.

Patty Quinn McAuley is the Director of Marketing at Clark Capital Management Group, a participant in the ETF Strategist Channel.