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How Advisors Can Help Independents and Accumulators Succeed

These two investor types have investing strengths and weaknesses. Here’s how to best advice each.

This is the fourth article in a series focusing on behavioral investor types and intended to help advisors strengthen their relationships with their clients by helping them better understanding clients' financial personalities. Once advisors understand the various investor types at play, they can adjust their advisory approach for each type. 

I recently introduced four behavioral investor types. Today we'll take a deeper dive into independents and accumulators, reviewing the "upside" and "downside" of working with these two specific investor types and providing suggestions about how to advise these types of clients.

Independents: Upside

  • Independents are cerebral, strong-willed thinkers who aren’t afraid to speak their minds and tell you their views on their portfolios.
  • Independents tend to do their own research and often come to client meetings with good ideas--ideas their advisors may not have considered.
  • Given their willingness to do research, Independents may be contrarian investors, which can be a very successful strategy. As we know, many investors are herd followers and as a result, don't generate the returns they need to reach their goals.
  • Because they are analytical in nature, Independents may help themselves by finding the lowest-cost service providers.
  • Independents tend to be thinkers and doers as opposed to followers and dreamers.

Independents: Downside

  • Independents can act too quickly, without taking the time to learn as much as they can about their investments before making them.
  • Independents may also seek information that confirms their decisions, rather than finding information that may contradict their hypotheses.
  • Independents may irrationally cling to their self-generated ideas instead being open to new ideas that may prove they are wrong.
  • The analytical nature of Independents may actually work against them at times. For example, some independents may focus too much on taxes and not enough on selecting an appropriate investing strategy--letting the "tax tail wag the investment dog."

Advice for Independents
Independents can be difficult clients to advise due to their mindsets, but they are usually grounded enough to listen to sound advice when it is presented in a way that respects their views. As we have learned, independents are firm in their belief in themselves and their decisions and can be blinded to contrary thinking.

As with followers, education is essential to changing the behavior of Independents; their biases are predominantly cognitive. A good approach is to have regular educational discussions during client meetings. This way, the advisor doesn't point out unique or recent failures, but rather educates regularly and can incorporate concepts that he or she feels are appropriate for the client. Education on the benefits of portfolio diversification and sticking to a long-term plan is usually the best course of action. Advisors should challenge their independent clients to reflect on how they make investment decisions and provide data-backed substantiation for recommendations. Offering education in clear, unambiguous ways is an effective approach. If advisors take the time, this steady, educational approach should yield positive results.

Accumulators: Upside

  • Accumulators are confident in their abilities, and as such, they are willing put their investment ideas into action. As I have said before, successful investing requires the fortitude to not only have conviction about investing ideas but also the confidence to put them into action. Accumulators have the confidence to act decisively.
  • Accumulators also understand what it takes to be successful: hard work and determination to succeed. Therefore, they often take the time to understand investment opportunities and examine the details of what they invest in.
  • Accumulators understand that building wealth is about accepting risk; not all investors grasp the significance of taking risk. This is not to say that accumulators are overjoyed when things don't work out, but they typically understand that not every decision is going to work out well.

Accumulators: Downside

  • The accumulator's biases relate in large measure to being too confident that things will go their way and believing that no matter what happens, they can exert some level of control over investment outcomes.
  • In reality, overconfidence usually leads to poor investment results, either because investors feel like they can out-smart the markets on a regular basis, or they trade too much.
  • Accumulators believe that investing outcomes can be controlled; this is a fallacy. Investing contains much uncertainty, and investors who believe they can control outcomes are not accepting the reality of the situation.
  • Accumulators often engage in "club deals" with their friends, which may not be well researched.
  • Accumulators also may have trouble controlling spending, may invest based on what they relate to in other parts of their lives, and be too optimistic in their investing endeavors.

Advice for Accumulators
Accumulator clients are often the most difficult clients to advise, particularly those who have experienced losses. Because they like to control or at least get deeply involved in the details of investment decision-making, Accumulators tend to eschew advice that might keep their risk tolerance in check. They are emotionally charged and optimistic that their investments will do well, even if that optimism is irrational. Some Accumulators need to be monitored for excess spending which, when out of control, can inhibit performance of a long-term portfolio. Other accumulators make investments that align with their world view but may not be the best investments for the long term.

For advisors, a reasonable approach to dealing with these clients is to take a leadership role in the situation. If the advisor lets the accumulator client dictate all the terms of the advisory engagement, they will always be at the mercy of the client's decision-making process, which at times can be emotionally driven, and the result will likely be an unhappy client and an unhappy advisor. Advisors to accumulators need to also demonstrate the impact financial decisions have on family members, lifestyle, or legacy. If these advisors can demonstrate to the client that they have the ability help the client make sound long-term decisions, they will likely see their accumulator clients fall into step and be better clients who are easier to advise.

Michael M. Pompian, CFA, CAIA, CFP, is the founder and chief investment officer of Sunpointe Investments, an investment advisor to family offices based in St. Louis, Missouri.  His book, Behavioral Finance and Wealth Management, is helping thousands of financial advisors globally build better relationships with their clients. Contact Michael at michael@sunpointeinvestments.com. 

The author is a freelance contributor to Morningstar.com. The views expressed in this article may or may not reflect the views of Morningstar.