Behavioural lessons from the chaos

A well-understood struggle for financial planners is the challenge of explaining the different elements of value that we provide to clients. Pierre Taljaard, Director and Financial Planner at Simple Wealth, explores the subject further.

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Historically, this list has centred around our technical expertise: investment, tax, insurance and legal advice. A growing group of financial planners have started adding “behavioural coaching” to this list. Numerous recent studies have explored this aspect in detail, a famous one being Vanguard’s “Advisor’s Alpha”.

In this study, Vanguard claims that one of the three pillars integral to our success is our “focus on behavioural coaching (in particular, helping clients adhere to their long-term plans) because that is the greatest potential value (we) can add”. It is easy to scoff at behavioural coaching as a value proposition, and many do. However, it is becoming more and more difficult to ignore the importance of helping clients to manage their own behaviour around money.

Are you managing money or people?

Behavioural economics is a relatively young field of study, so it is to be expected that its practical application will take time to spread through the different disciplines that make up the financial services industry. For practitioners whose roles are based on product distribution, it’s unlikely to become a priority soon. However, for advisors whose career success is tied to the long-term financial success of their clients, it is fast becoming a required skill to engage meaningfully.

Nick Murray, the American advisor to advisors, has stated that 80% of a financial planner’s fee should be for their behavioural modification service. This is not an easy thing to sell to investors. Most investors are drowning in news headlines about market predictions and fund rankings and are reluctant to acknowledge that they are prone to making stupid decisions. However, we regularly experience market events which make the importance of sticking to a long-term plan more tangible.

In the last year we have experienced a few such events that have reinforced the importance of being able to engage meaningfully with emotional, and seemingly irrational, clients. Valuable lessons could be taken from the GameStop saga and the recent surge in value, and volatility, of Bitcoin. However, the most significant event was the Covid-related market correction that started in February and ended on 19 March 2020. In South Africa we saw a decline of 35% in only 32 days.

At the end of this decline a three-week lockdown was announced. The consequences for company profits and employment numbers were well understood. This was soon followed by multiple lockdown extensions. It was impossible not to ask, “Is it different this time?” And yet, at the time of writing (almost a full year after the market bottom) the South African share market is up 79% from the bottom.

No matter how many times we, and our clients, have been through turbulent times, the temptation to “do something” remains.

It is not necessarily the case that all corrections will be followed by great returns (although historically this is exactly what a correction has led to, in most cases). But the real lesson is that having knee-jerk reactions based on our emotions at the time is not a recipe for long-term financial success. No matter how many times we, and our clients, have been through turbulent times, the temptation to “do something” remains.

The probability of staying disciplined during times of increased uncertainty increases significantly when a caring and sensible third-party is involved. Admitting that this role of guide is one of our most valuable is no slight on our technical abilities. It’s an acknowledgement of the danger we are to ourselves when acting on recent events. Most clients do not have the fortitude to remain stoic by themselves. Most investors will always require a calm voice of reason.

Research from Momentum indicates a 300% increase in the number of portfolio switches during March 2020. Those investors switching from growth to income assets at that time have likely stolen years of independence and dignity from their future selves. The behavioural financial planner who managed to convince their clients to remain invested, despite the fear of an uncertain future, has earned their fee for the next decade. They have also saved these clients from potential financial ruin.

Simple, not easy

Pierre Taljaard, Director and Financial Planner, Simple Wealth

The events of 2020 are an encouraging reminder to the behaviourally focused advisor, that clients are in desperate need of our approach. Engaging in this manner will never be easy.

Adopting a coaching way of being requires a growth mindset and an attitude of constant learning, but the rewards for ourselves and the profession we’re building are significant.

Humans Under Management was an event first hosted in 2017, and the organisation’s mission is to promote, highlight and build on the work that great advisors are doing in developing their behavioural financial advice practices.

The event will be hosted in South Africa for the third time in 2021, with a virtual event currently planned for 15 September.

More details and tickets will be available at www.humansundermanagement.com.