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A Surefire Way to Better Serve Your Clients and Build a Stronger Practice

Scott's Column | , , ,

Do you want to differentiate your firm from the competition, while adding value to your client relationships?  Focus attention on an area that is ignored by most advisors: client profiling.

Because few advisors even think of this as an area where they might add value, it presents you with a great opportunity to stand out in a way your clients will understand and appreciate.  It has the added benefit of putting your clients, rather than their portfolios, at the center of the process and improving their chances of achieving their goals.

If you’re wondering how client profiling could possibly be an area worth your attention, then you haven’t been exposed to the research of Professor Shachar Kariv of UC Berkeley.  I heard him speak at a Garrett Planning Network conference and was so impressed we asked him to do a Master Class for our firm.  I got a deeper dive into his research at a UC Berkeley Executive Education session in New York.  What follows was inspired by what I learned from him.

Most advisors are pretty good at collecting the facts about their clients’ assets and liabilities. Few are skilled in developing behavioral profiles of their clients.  Yet understanding how your clients make decisions and how they are likely to react in times of stress is crucial to designing plans and portfolios that are tailored to their unique needs.

Think of client profiling as a separate part of the client onboarding process.  Develop a strategy, tools and work flows to support that process.  Too often it is treated in a perfunctory way.  Spend the time necessary to understand the needs and characteristics of each client so you can offer the services and support that is most likely to get them to their long-term goals.

As an advisor, your job is to understand and balance the three dimensions that are common to every client: their goals, constraints and preferences.  To do this at a high level you will need to explore each of these areas separately and document your findings.

Most clients have multiple goals.  These should be identified and prioritized.  Few clients can effortlessly list and rank their goals, but most of them, if coaxed, can articulate them and give you a general sense of their relative importance.  Even a basic understanding in this area will give you an edge over most digital advice solutions and many of your human competitors.

There are usually constraints that affect a client’s ability to reach their goals.  Time and current financial assets are the most common.  These should be identified and documented.  This will keep your advice grounded in reality, build trust and keep you from making recommendations that show you did not take the time to understand the client’s unique situation and needs.

Then there is the problem of discovering and cataloging a client’s preferences.  “Preferences,” in this context, is an umbrella term that includes emotional and cognitive characteristics that affect how the client perceives the world and makes decisions.  Understanding a client’s preferences improves your ability to make recommendations a client can live with over time.

The industry has traditionally used risk tolerance questionnaires to fill this need.  Until recently, these were the only tools that advisors had available to them and they have become quite pervasive.  But research has shown that these questionnaires have a number of inadequacies.

First, client’s “stated preferences” regarding their own risk tolerance are not particularly reliable.  Clients are notoriously bad at understanding and reporting their own risk tolerance.  Many don’t even understand the concept and so have difficulty responding meaningfully to questions about this behavioral characteristic.  Plus, risk tolerance changes over time.

The practice of assigning a client to a portfolio based solely on their risk tolerance is becoming commonplace, but is suboptimal.  A client’s risk profile is multi-dimensional.  Making recommendations based on only one dimension—risk tolerance—is like trying to make a suit for a person whose height you know, but whose waist and chest size you do not know.

Focusing on risk without considering a client’s goals and constraints is an unbalanced approach.  A client who has aggressive goals, but few current assets and a low tolerance for risk will never reach their goals if they are assigned to a portfolio based solely on their risk tolerance.  An advisor’s recommendations should take into account all aspects of the client’s situation.

A client’s risk profile should consider at least 4 dimensions of risk.  The first is a client’s “risk requirement.”  That is the amount of risk a client should take to reach their stated goals.

The second dimension is “risk capacity.”  That is the amount of risk a client can afford to take given their current constraints of time and financial resources.

The third dimension is “risk tolerance.”  Risk tolerance encompasses a person’s attitudes around risk taking, including their comfort with taking risk, their ability to deal with adversities when times get tough, and their capacity to deal with uncertainties.  Understanding all aspects of a client’s risk tolerance is crucial to an advisor’s ability to serve clients well.

The fourth dimension is “risk perception.”  This refers to a person’s attitudes about the likelihood of bad events occurring. Some people are more optimistic and see the possibility of bad events occurring as less likely than pessimists, who see them as more likely.  Knowing a client’s risk perception can help you better counsel the client both before and after bad events.

Hopefully, this will get your creative juices flowing and will help you think of ways to better understand and serve your clients, while setting your firm apart from others.  Develop a client profile that considers the client’s goals, constraints and preferences.  Measure each client’s risk profile in 4 dimensions.  Then balance these factors in making recommendations to your clients.

To learn more, listen to the recording of the Master Class presented by Professor Kariv. Kariv’s work is both groundbreaking and worthy of your attention. TrueProfile is the name of a practical toolset advisors can use that is based on his research.  Check it out.