Between the sprint to Tax Day at the beginning of the year and the rush to meet annual targets at the end, financial advisors can help clients confront a bias toward the status quo.
Processing Content
With a midyear meeting strategy that avoids calling clients out for their natural inertia or hitting them with a laundry list of tasks, planners could steer customers away from costly mistakes, according to Anna Rathbun, the founder of Beachwood, Ohio-based registered investment advisory firm Grenadilla Advisory. Scheduling a meeting when many clients are leaving town for summer vacations may prove challenging. And while many peers are out of the office, advisors have plenty of opportunities — including essential chores that are part of the behavioral coaching that is perhaps their most valuable service.
For instance, tasks like updating the beneficiaries across accounts and assets in estate plans, checking portfolio allocations against the first six months of investment data in a year or even moving into a more conservative mix in older clients’ 401(k) plans could have fallen by the wayside during busier times, Rathbun noted.
Gregory
“A lot of advisors would agree that there’s a decision avoidance,” she said, that may tilt clients toward common investor biases. Rathbun suggested avoiding phrases like “bias” or “decision avoidance” when broaching such topics with clients.
“There are so many different reasons why people are busy, and you don’t want to give them a daunting list of things we can do,” Rathbun said. “A lot of people, once they get started, then they remember this and they remember that and all of a sudden they’re involved in the conversation.”
READ MORE: Why young Americans aren’t relying on homes to build wealth
No need to delay important conversations
Other possible fruitful midyear topics to discuss with clients may revolve around their satisfaction with the firm, planning for educational costs in the coming school semester or reviewing whether their cash flow needs have changed due to rising expenses or inflationary trends.
Just like any other season, summer marks a good time for “saving for retirement, managing risk, or building wealth,” according to one guide to midyear planning by Mark de Gregorio, a wealth advisor with Mercer Advisors. His five tips called for examining whether to rebalance portfolios, evaluating retirement plans, looking at insurance needs, checking estate plans and considering tax strategies.
“Longer days, backyard barbecues, and summer getaways often take center stage this time of year,” de Gregorio wrote. “But before you shift into vacation mode, take a moment to check in on your financial plan. Why? Because life changes, and so do the markets. A midyear review is your opportunity to help ensure your financial strategy remains aligned with your goals.”
Status quo risk
The clients may be losing that focus, if they fall into the common form of risk aversion that makes the status quo look more attractive than moving proactively toward their goals.
It could also mean they’re investing with “an unbalanced portfolio, holding investments that may no longer be suitable for them and their goals or sticking to a single asset class instead of diversifying,” according to a blog post on status quo bias released last year by the Nova Scotia Securities Commission, a Canadian regulatory agency. To push back against that bias, investors should consult with experts, check objective data and think through alternatives.
“Status quo bias can often impact your ability to change financial products and the investment decisions you make over the short and long terms,” the regulators wrote. “In many cases people influenced by status quo bias will stick with the same credit card, accounts or mortgage broker despite the fact that making a change may provide them with better interest rates, lower fees or other financial advantages.”
READ MORE: SLATs offer advantages for the ultrawealthy — but beware matching trusts
Steering toward more productive behavior
In the middle of the year, that tendency toward inertia may cause clients to delay converting their traditional individual retirement account into a Roth or contributing to one, or to procrastinate on other actions that could reduce their taxes, Rathbun said. The status quo bias could even affect, for example, a family that has already completed a will; many clients don’t know that a retirement plan’s beneficiary designation will likely override a will’s instructions.
Like many planners who are increasingly embracing the psychological side of their profession, Rathbun views these behavioral topics as an important method for understanding clients’ actions and guiding them away from harmful errors. After launching her Cleveland-area firm last year following tenures as the chief investment officer of CBIZ Investment Advisory Services, the wealth management division of the giant accounting firm, and a managing director with fee-only RIA firm Clearstead, she said the duty to care for her clients brings out her best work.
“It makes you much more effective if you recognize some of these biases in clients,” she said. “If they can’t understand it, then ultimately you don’t have their buy-in, and then you’re saying, ‘Oh, just trust me because I know more.’ And that’s not productive.”
