How to Keep Clients Motivated and Stop Them from Making Bad Decisions
According to leading psychologist Danial Kahneman, people often form responses instinctively – accepting the first judgement that comes to mind. When left to own devices, we’re apt to make poor decisions based on fallacies or personal biases. And this is never truer than when it comes to investing.
The greatest challenge faced by any financial advisor is that of keeping clients invested for the long term. When the markets are down clients become anxious – they instinctively want to move their money out. Alternatively, they may want to start chasing ‘hot stocks’ in a bid to boost performance. Either way, they’re at risk of abandoning their long-term financial plan.
It’s your job to step into the breach and stop clients from making bad decisions. You need to act quickly to keep them invested.
Here’s how to stop clients from making bad decisions and help them stick to the plan – no matter what the market conditions are.
First, help clients envision the future
When a client agrees to a plan, they’re acting in their long-term interests. So, it can seem surprising at how short-term they immediately become once they’ve started nervously watching the markets.
Make sure your clients see how much better off they will be if they stick with the plan. Mitigate their frustration by reminding them why they invested in the first place.
Help them paint an image of their perfect future and make it visceral and scintillating. Make them see that the payoff for investing will make them undeniably happy – whether they will be relaxing, traveling or playing golf. Tell them their problems will shrink as they work towards their goals.
Then, explain volatility using stories and analogies
Clients mistakenly anchor onto the price of a security rather than on its inherent value. To keep them on track it’s up to you to change their perception.
Explain market volatility using stories and analogies – they will make it more understandable and less threatening. Everyone loves stories (and analogies are essentially little stories wrapped around a message). Prepare in advance for volatility by having your stories and analogies at hand, ready to present – by practicing them until they’re pitch perfect.
Here are a couple of ways to bring the nature of volatility home to clients…
An analogy to explain the inherent value of an investment
When clients see their investment drop, they decide that it’s ‘broken’ and they feel the need to fix things. Tell them rather than seeing their stocks as ‘cheap’ when the markets are down, they should see them as ‘great value’. Ask them what they do when they see a bargain in the sales? Naturally they snap it up. They don’t for one second think they’re buying a second-rate item.
It’s the same when a portfolio falls in price. The ‘goods’ themselves – be they mutual funds or something else – aren’t damaged. These investments haven’t lost any of their inherent value – short-term volatility merely affects the price. And prices will rebound in due course, because of the overall tendency of the stock market to rise over time.
A story about why they should follow the trend
Tell your clients you have a crystal ball and you can use it to predict what’s going to happen in the next ten years (a statement that will probably be met with amusement). Say that you know that next year the markets will be at their worst ever, then there will be a global recession. In subsequent years the government will run out of money, presidents will resign, and unemployment will rage.
Then ask them – in light of what you know – would they want to put their money in the stock market? They will probably reply with a resounding ‘no’.
What you can then tell clients is that, in actual fact all these things have already happened – and that investors who kept their money in the stock market won out eventually. Things rallied. There will always be market volatility, but the Dow continues, over the long term, to climb a wall of worry.
These should help you change clients’ perception of volatility – that it’s not the enemy – and that it’s more important to focus on the trend.
When a client’s belief is shaky and they’re teetering on the edge due to market conditions, you are the only thing standing between them and a bad decision. Take charge of the situation by being assertive. Draw word pictures and remind them why they decided to invest and why it’s still important. Use stories and analogies to explain the nature of volatility so they make the right decision – to stick with the plan.