PREDICTABLY IRRATIONAL. The more affluent, the more irrational

It. Affluent clients think they’re rational.They’ve got money. They have a lot of success under

their belt. But in a financial advisory relationship,

I’ve got 40 years of evidence and 40 years of experience

to tell you that affluent clients are not rational

when it comes to money. Now, my name is

Mark a little I want to cover a couple of issues that I think are

critical if your goal is to serve

individuals or families, helping them

coordinate their financial affairs. So I call this role

financial advisor. You might be working in

investment management. You may be working in financial planning. You may

be working in other areas of financial services. But if it’s your job

to coordinate the financial affairs of an affluent

individual or of an affluent family in any way whatsoever,

you need to be aware of the fact that affluent

clients are actually quite irrational when it comes to money.

Now, the reason that I’m saying this is just.

It becomes so obvious the more decades that you serve

these types of clients. Now, obviously, they’ve accumulated

a lot of money, they’ve achieved a lot of success. So they have certainly

figured out a lot in life.

But somehow this always translates into them

thinking that when it comes to big financial decisions, like when you’re

sitting down to deploy a large portfolio

of assets and invest it in a certain allocation

or whatever the case, whenever you’re making decisions regarding

big sums of money with these affluent clients,

you need to know that they think they are approaching this topic

with total logic, that every financial decision is

made quite logically, using rational thought,

and that they’re, in essence, sticking to the facts and making

those decisions based on facts. I am telling you,

that is not what’s happening. The more affluent

and the more successful the client, I would say the

more the stakes are higher and that the decisions are based

on emotion and then later

explained through rational thought. All right? And we

all do this. I think you recognize economic

behavioral economics well enough to know that this is true in

all of us. We tend to act on emotion

and then justify it with logic. Okay? Now,

the problem is, when you are in charge of

coordinating the financial affairs for an affluent individual or

an affluent family, you can’t just come right out and say that it doesn’t

work. To say, well, you do know that you’re operating on emotion

here, and you’re about to make this multimillion dollar decision

based on emotion rather than logic. That doesn’t

work. So the question is, what does work?

Now, the reason I’m bringing it up is because it’s

a long road to getting there, and you have

to start early. My recommendation is you begin having

conversations before the relationship begins.

And it is to set the stage for what I think

is really the business that we’re all in. I think, yes,

we think we’re in the investment management or financial planning or

whatever we do in financial services. We think that that’s what we’ve been

hired to do and that’s what the client values. No,

that’s not it. The client will

recognize this later and not recognize it

in the moment. But the real job that we have, if we’re going

to be really good at this, is to be

skilled and to be prepared to talk these affluent

clients out of a horrible

emotional mistake that they are going to make at some

point, because fear takes over.

When you are making a recommendation that involves a lot of

money. Well, there they are, thinking the stakes are high.

If I screw this up, my family, my ancestors,

everybody’s going to say he blew it.

And so they don’t want to make that mistake. And that’s oftentimes

what’s driving the emotional decision. So what do you do about it?

You start at the beginning of the relationship. You establish fundamental

investment principles. You explain what works

and what doesn’t work in a benign environment.

So before you start working with them, they’ll agree

to anything that sounds rational and sensible.

So what do you do? You get them to agree up front.

Now, what do you do if the client’s already a client or has been a

client for a long time? You project this irrationality

onto other people. You tell them stories,

preempting these big decisions, saying, I’ve had clients that

they think they’re approaching big decisions logically,

but I’ve seen so many times that there’s actually

emotion involved. And then you tell a little story where that

was the case and you all laugh about it,

and you’re able to get them to agree with you. Yeah,

that’s crazy to operate that way.

And by getting them to agree in principle that affluent

people do make emotional decisions,

well, when it’s crunch time, when they’re about to tell

you, oh my gosh, if so and so is elected president, I’m selling

everything. We’re just going to move to cash for six months or until it

all sorts itself out. You’re able to sit down and

call back to your fundamental investment principles that says

whatever you’ve told them. In my case, I make them agree up

front that they have to have faith in the future for

them to work with me. Now, they’re willing to agree to this

before the crisis. But once you’re in the crunch time and they’re trying

to do something crazy or propose a mistake that’s going to blow

up their financial strategy, you need to

have had a lot of benign conversations in advance

of that where you’re able to agree in principles,

like you have to have faith in the future. Otherwise, what are we doing here?

It all sorts itself out eventually. And if you can’t

agree to that upfront, well, then we’re going to have a

problem at some point. And then when there is a crazy

recommendation on the table, you’ve earned the right

to call back to that conversation that you’ve had with them,

hopefully over and over and over again so

that they recognize that this time it’s them operating

on emotions and you never had to even say it out loud.

So I’ve got 37 things that

clients do not like, things that financial advisors

do that really irritates them. I put the link in

the description below. So if you look

through that and you have any questions, just put comments on this video. We’d love

to hear from.