Adviser-Client Relationship Implications

The success of the typical client/adviser relationship can be measured in four areas, and each one is enhanced by incorporating behavioral finance traits:

  1.   The adviser understands the long-term financial goals of the client. Behavioral finance helps the adviser understand the reasons for the client’s goals. The client/adviser relationship is enhanced because the client feels the adviser truly understands him and his needs.
  2.   The adviser maintains a consistent approach with the client. Behavioral finance adds structure and professionalism to the relationship, which helps the adviser understand the client before giving investment advice.
  3.   The adviser acts as the client expects. This is the area that can be most enhanced by incorporating behavioral finance into the client/adviser relationship. Once the adviser thoroughly understands the client and her motivations, the adviser knows what actions to perform, what information to provide, and the frequency of contact required to keep the client happy.
  4.   Both client and adviser benefit from the relationship. The primary benefit of incorporating behavioral finance into the client/adviser relationship is a closer bond between the two. This results in happier clients and an enhanced practice and career for the adviser.

As one of the first steps in the client/adviser relationship, the adviser has the client fill out a risk tolerance questionnaire. Unfortunately, the same individuals can give different answers to the same set of questions depending on their frame of mind or current circumstances. In addition, most questionnaires are not structured to measure behavioral biases. This means there are a number of limitations to the traditional questionnaire.

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