Riding the emotional highs and lows with clients

The movie image is always the same — the cool, calculating suit, watching stock figures float down the lap top screen until at some point he speed dials his broker and shouts “Sell” down the line.

His decision is rational - investing is just about facts and figures.

Yet the very language of the markets belies this image - 'investor confidence', 'market sentiment' and can anyone forget the term 'irrational exuberance'?

These phrases highlight the fact that at heart investing is an emotional business.

And for financial planners, who stand at the point between an investor and the actual investment, understanding this emotional process could be the key to leading their clients through it.

Organisational psychologist, Karen McMillan, has just completed some research for Macquarie Financial Services that offers some pointers to help financial advisers better understand some of the emotional complexities of their clients.

McMillan says the traditional view has been that emotions get in the way of rational decision-making, leading to wrong or inappropriate choices.

"However, recent research suggests that we can't make a decision without access to our emotions," McMillan says.

She says psychologist, Antonio Damasio, first raised this issue when studying the decision-making capabilities of brain-injured (though not intellectually impaired) people who could not use their emotions.

"Damasio found that these people could not decide between one thing and another, which suggests that we use emotions in a positive way to make decisions," McMillan says this "emotional intelligence" helps create the context for everyday decisions including those about financial products.

"Whether you are a financial planning professional, a fund manager, broker, accountant or a client, you need to be aware that emotions are an important driver of our decisions," she says.

"A planner is not usually a trained psychologist, but he or she is often required to be something of a counsellor to their clients, who may want advice as a result of some crisis that has triggered strong emotions."

While McMillan is not suggesting planners need to have a degree in psychology, she says some basic training can help them identify emotional responses in their clients and plan appropriate strategies.

"In the first place it requires empathy - if you can't tune into another's emotions it will be very difficult," McMillan says.

"But most ordinary human beings are capable of empathy, unless they're pyschopaths or sociopaths."

Hopefully, not many planners fit into these categories.

While planners may understand that 'something is up' with their clients, McMillan says they may not necessarily be aware of correct techniques to deal with it.

She says it is important to first know the basic situations in a client's life that may be eliciting strong emotional reactions - such as a death of someone

close, divorce or buying property.

Using careful observation and a variety of techniques planners should be able to guide their clients to an appropriate decision about their investments, even if that decision is to do nothing at the time.

"We can describe the sort of things to look for but it is not as simple as taking a quiz," McMillan says.

Head of technical services at Macquarie, David Shirlow, agrees that the reasons behind a person's investment decisions are often complex and cannot be measured with a risk profile survey.

"Planners may fall into the trap of simply measuring a client's attitude to specific kinds of financial risk, and therefore overlooking the larger emotional context," Shirlow says.

"Attitude to risk is just an outcome of a person's emotional makeup, not the whole picture."

Financial Planning and the Client's General Emotional Makeup

Anyone giving financial advice needs to understand each client's broad emotional makeup. For this reason a good planner is as likely to talk about tolerance for risk as they are to discuss financial goals and portfolio options. A planner might also discuss the idea of investing for the "long term" and try to gauge reactions as time passes and clients assess the unfolding results of investment decisions.

What the plannerreallywants to know is:

will clients panic when an investment produces negative returns over short periods?

will clients have the patience to ride out the ups and downs of the market in expectation of a positive outcome over appropriate time frames?

So what can financial planners do to help clients make the best use of emotions when making investment decisions?

Planners must first try to make an assessment of the client's emotional state in order to judge whether this person is in a good frame of mind for decision-making. Some strategies might include:

Use basic listening skills tuning in especially to the emotional sub-text of what the client is saying. Listen for 'emotive' words like 'boy, I really wish that….'; I'm concerned that….'; 'I can't wait for….'; 'I'm annoyed that….'.

Explore the emotional sub-text by 'reflecting 'words back eg 'So you're concerned' or by clarifying 'Sounds like your pretty angry - is that what you're saying?'

Listen and watch for 'strong emotions' by looking for warning signs such as - overly anxious

Repeated questions and 'obsessing' over a particular issue or aspect (overly anxious)

Thinking seems muddled - poor sentence construction, contradictory statements, keeps going off on tangents

Frequent negative or pessimistic statements

Poor memory - can't remember basic facts or statements

Keeps contacting you over minor issues

Angry/Vengeful

Keeps talking about getting someone back or getting payback

Makes angry or hostile comments

Snaps or gets aggressive

Over confident

Repeated mention of unrealistic or overly optimistic aspirations

Impulsive responses

Can't seem to delay gratification - wants results immediately

Depressed

Seems lethargic

Complains of not being able to sleep/eat

Very teary

Negative about the future

Can't seem to make any decisions

Watch for Positive Signals

Smiling and alert presence

Listens carefully and responds appropriately

Expresses positive and optimistic views

If the person is demonstrating high levels of emotion, a planner might recommend a holding pattern strategy to allow time for the emotions to be worked through. Empathy is useful here and while the planner can't be a therapist, you can ensure that clients don't make crazy decisions just because they are very emotional.

With people who are very anxious, you might present a 'safer' option but work towards desensitising the client by providing simple reassuring information on a regular basis, especially on options which the client might find a little more risky. Of course, it is best not to push anxious people into an investment they feel uncomfortable with - it will be the planner who gets the blame if the investment doesn't work out.

Source: report by Karen McMillan Consulting for Macquarie Financial Services Division.