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How to Advise 'Open' Investors

Contributor Michael Pompian offers ideas for working with this personality type.

This is the final article in a series focusing on the Big Five personality traits and how they relate to the behavioral biases of investors. Over the years, I have followed a debate between the effectiveness of the Myers-Briggs test versus another widely used personality test, the Big Five. More recently, the debate has intensified. I decided to conduct a study of the Big Five. I studied 121 investors, examining the relationship between the Big Five and investor biases. Why? Because taking the time to understand the underlying personality of the investor leads to better advice and results.

This month's article provides advice on dealing with investors high in openness, the subject of last month's article.

As a refresher, the primary characteristics of openness are imagination, curiosity, and creativity. People who are high in openness tend to have a broad range of interests and skills. They are inquisitive about the world and other people--and are eager to learn new things and make new experiences. "Open" people tend to be adventurous and creative. Those low in this trait are more traditional and may struggle with abstract thinking.

Working With Open Investors
Open investors are similar to neurotic investors in that they tend to place a great deal of emphasis on financial security; they don't like change. Although they are adventurous by nature, open investors are often deliberate in their decisions and sometimes have difficulty taking action with their investments out of concern that they may make the wrong decision. They instead may prefer to avoid risk and stick to the status quo. They are also subject to overconfidence. This means that advisors need to keep these clients aware of investment risks. Because they are creative, open investors may be "outside the box" thinkers and ask good questions. Some open investors don't like investing, and many put off making investment decisions without professional advice; the result is that they maintain, often without realizing it, high cash balances. 

Open investors may not comply with professional advice when they get it, and advisors likely need to educate them financially. As such, advising open investors can be difficult at times because they may not want to react to market changes as they happen or have an aptitude for the investment process.

Upside/Downside of Open Investors
Open investors may realize that they aren't good with money and decide to hire an investment advisor to help them. This is good news for them, because advisors can help to bring discipline to the investing process, which is much needed with this investor type. Open investors can be creative in their thinking, which can lead them to be contrarian investors; this, too, can be a plus, as there are many investors who are herd followers and are often not pleased with their investment outcomes as a result.

The downside to open investors has mainly to do with a lack of discipline during the investment process, assuming they do not hire an advisor. For example, left unadvised, open investors may use their creativity to overweight non-mainstream asset classes, such as gold. Or if they have trouble making decisions, they may hold excess cash. In and of itself this is not a bad thing, but their asset-allocation plan may not be balanced as a result. Sticking to a long-term asset allocation plan is the right course of action. 

Advice for Open Investors
Because open investors may have asset-allocation imbalances in their portfolios, education is essential to changing their behavior. A good approach is to have regular educational discussions about the importance of rebalancing and to establish sensible targets during client meetings. This way, the advisor doesn't point out unique or recent failures but rather educates regularly. 

Be flexible with open investors and illustrate concepts that you feel are appropriate for each client. If they are comfortable, advisors can ask these types of clients to be introspective and potentially discuss outcomes that did not turn out favorable. Offering education in clear, unambiguous ways so they have the chance to "get it" is an effective approach. 

If advisors take the time, a steady, educational approach will generate client loyalty and adherence to long-term investment plans. If advisors can demonstrate that they have the ability help clients make sound long-term decisions, they will likely find their open clients easier to advise.

Michael M. Pompian, CFA, CAIA, CFP is an investment advisor to family office clients and is based in St. Louis. His book, Behavioral Finance and Wealth Management, is helping thousands of financial advisors and investors build better portfolios of investments. Contact him 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.