It is the extent to which investments are linked to a client's life objectives that defines rationality and ensures you can add value to them, says Kees Stoute.
This year, Mr Chan enjoyed an investment return of 6%. Unfortunately, all his friends seem to have fared much better. This annoys Mr Chan as it makes him a feel less smart than his friends.
What did they see that he obviously missed? Do they maybe work with a better, more competent wealth manager?
Mr Chan gives his wealth manager a tough time and tells him to do much better if he does not want to get fired.
From this conversation between Mr Chan and his wealth manager, it follows that Mr Chan’s key investment objective is to outperform his friends.
However, does Mr Chan know all the details of how his friends came to their claimed exceptional performance? How much risk have they taken? Are they talking about an investment return over their entire investable assets, or are they only referring to a (small) portion of their portfolio that delivered this claimed return?
It is therefore better to rephrase Mr Chan’s investment objective as follows: “He wants to do better than how his friends claim they do.”
This sounds like the perfect recipe for stress, most likely forcing you in the corner of the desperate salesmen. The more that emotions stand in the way of taking rational decisions, the more difficult it will be for any wealth management professional to (consistently) add any meaningful value.
Clarity over wealth
The first step in reducing the impact of emotions is to help the client define what it is he wants in life and which role his wealth should play to facilitate this. Once that is defined, it starts to make sense to look at how his wealth should be deployed to enhance the likelihood to succeed.
It is sad to say, but from experience we know that wealth does not represent much value as long as the client has no purpose for it: Wealth without purpose tends to be fraught with emotions.
After obtaining clarity about what it is Mr Chan wants in life – for example, sustaining his current lifestyle, travelling, keep harmony in the family, leaving a memorable legacy, etc – it becomes much easier to become rational in regards of his investment portfolio.
If it follows that Mr Chan only needs an annual return of 5%, so why take more risk than necessary? If Mr Chan knows exactly which return he expects to live the life that he wants, and then acts accordingly, then who is the smarter one among his friends?
It is certainly not the level of return that determines in hindsight who was more rational about investing.
It is therefore important to establish and get past the client’s emotions towards wealth. That is not only good for your client, but also for you.
If a client understands why you give certain advice and how this advice is aimed at achieving what it is he wants in life, you will enjoy the status of wealth management professional rather than desperate salesman.
Contact Kees: [email protected]
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