When building trust with clients, financial advisers not only must “understand the future needs of each client, they also must identify fund managers who generate investment returns in line with client expectations,” writes Shreenivas Kunte, CFA, in this month’s Enterprising Investor.
Striking this delicate balance can be tricky, Kunte says, given that the needs of investors are “structurally and behaviorally different” than those of fund managers. Investors, for example, are bombarded by vast amounts of data that “adds to behavioral vulnerabilities, making everyone involved predictably irrational.”
Kunte asserts that advisers can “counteract these behavioral limits” and build trust by establishing a clear understanding of the mindset of each client when formulating an investment plan. He identifies the following four “investor types”:
- Preservers have a loss-averse mindset and worry about short-term performance;
- Followers are passive and often lack interest in investing;
- Independents have original ideas and like to get involved in the decision-making progress;
- Accumulators are confident and tend to play an active or even controlling role in investment decision making.
Kunte suggests that advisers should “conduct in-depth interviews to get a firm grasp on which traits predominate and to what degree. Once that’s accomplished, advisers can tailor and recommend an investment plan that takes these factors into account.”