How to Advise Preservers
Here are some strategies for overcoming this behavioral investor type’s biases.
This is the sixth article in a series focusing on behavioral investor types and is 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.
Last month, we reviewed the case of Gina Fleming, a high net worth individual. Here are some of the salient points about the case:
As her advisor, you are concerned that given her conservative allocation, she will be unable to sustain her lifestyle or reach her financial goals. You suspect her discomfort at the prospect of re-allocating her portfolio is due to one or more behavioral biases. You are also trying to ensure that she feels comfortable enough with your investment solution that she will not decide to change it in six months. To better understand her situation, we are going to answer the following questions and then will provide a suggested solution to her investment situation.
Case Study: Answers to Questions
Fleming's biases are very consistent with a preserver behavioral investor type. We know that because, based on the descriptions in the case study, she has the following biases:
The preserver prefers a conservative portfolio. Because she does not tolerate risk (loss aversion) and does not like change (status quo), she would naturally prefer the current asset allocation (90% bonds and cash and 10% stock) that she now possesses. Also, given the stock market's recent volatility, Fleming will likely make faulty conclusions regarding current and expected prices (anchoring) and will therefore feel wary of any exposure to equities. Fleming has dismissed any advisor's attempts in the past (including you) to get her to increase her exposure to equities.
She might outlive her assets if she adheres to her present allocation. Her level of wealth, while adequate at present, isn't substantial enough to afford her the (dubious) luxury of an unbalanced allocation of funds in the long run. If you adapt to her biases--meaning you consent to stick with 90% bonds and cash and 10% equities--then her only critical, financial goal becomes jeopardized. However, her biases are largely emotional (status quo, loss aversion) and typically cannot be corrected with advice and information. This will complicate things if you attempt to moderate her biases.
It is therefore your task to make a blended recommendation, one that takes into account her financial goals while at the same time considers her emotional (difficult to correct) biases. You decide that a reasonable allocation is 35% equity, 20% cash, 45% bonds. You also think that she should to reduce her concentrated position in Exxon stock in a tax-efficient way. You call her to schedule a meeting to go over your recommendations. When you have your meeting, you decide that you will accomplish the following as it relates to explaining your recommendations and her reactions to them:
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 email@example.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.
Michael Pompian does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.