How to Advise the Accumulator Investor Type
Here are some strategies for overcoming this behavioral investor type's biases.
This is the eighth 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 Gary Rossington, a high-net-worth individual. Here are some of the salient points about the case:
To better understand his situation, we are going to answer the following questions and then will provide a suggested solution to his investment situation.
1. What is his behavioral investor type?
2. What behavioral biases might drive Rossington's behavior and decision-making? What specific evidence leads you to this diagnosis?
3. How might Rossington's personal biases affect the asset-allocation decision?
4. How should the advisor approach the client to moderate or adapt the impact of these biases?
5. What is a reasonable allocation recommendation for Rossington?
6. How should you as the advisor facilitate the client conversation so that the client makes a good and thoughtful investment decision and shows more consistent investor behavior?
Case Study: Answers to Questions
Rossington's biases are very consistent with an accumulator behavioral investor type, or BIT. We know that he is an accumulator because, based on the descriptions in the case study, he exhibits the following biases:
The accumulator behavioral profile leads to a clear allocation preference for risk. Because he tolerates high risk and engages in high spending (overconfidence), invests in risky venture capital deals (affinity), and places a premium on spending today versus saving for tomorrow (self-control), he naturally prefers the current risky asset allocation. Also, Rossington believes he can control the outcome of his investments (illusion of control) and may be taking more risk than he understands; he has dismissed any attempt by advisors in the past (including you) to decrease his exposure to risk assets.
Rossington might outlive his assets if he adheres to his “spendy” ways, and your financial planning confirms your fears. His level of wealth, while adequate at present, may not last in the long run, especially if he has to sell assets at the wrong time: during a severe market downturn. So, if you adapt to his biases--consent to stick with his risky allocation and ignore his high spending--then Rossington's financial goals may become jeopardized. His biases are principally emotional (self-control, overconfidence, affinity) and typically cannot be corrected with advice and information.
It is therefore your task to make a blended recommendation--one that takes into account his financial goals while at the same time accounts for his emotional (difficult to correct) biases. Therefore, you decide that a reasonable compromise allocation is 65% equity, 10% cash, and 25% bonds. You also plan to recommend that he reduce his spending. You call him to schedule a meeting to go over your recommendations. When you have the meeting, you decide that you will accomplish the following as it relates to explaining your recommendations and his 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 firstname.lastname@example.org.
The author is a freelance contributor to Morningstar.com. The views expressed in this article may or may not reflect the views of Morningstar.