The "softer" side of investing

Advisors looking for an edge in growing their practice might be interested in developing the “softer” side of investing. Most observers would agree that the financial advice industry is pretty good at managing the technical aspects of investing but many clients also expect advisors to understand their psychological needs about money. Many advisors fall well short of embracing this vital aspect of wealth advising. The job isn’t only about crunching numbers but also being able to talk about feelings regarding money. The difference between being a good advisor and being a great advisor can come down to building long term emotional connections that can span generations.

It is not all that surprising that many advisors think that anything touchy-feely should be managed by a psychologist but that comes with an inherent dilemma because most practitioners in the mental health field are not financial advisors. Financial advisors have an advantage because they can initiate a conversation that clients would be reluctant to discuss with anyone else. The advisor’s real advantage comes with taking the conversation to the next level. A lot of advisors are comfortable discussing dollars and cents but a large majority of them are uncomfortable with talking about the emotional aspects of money. One reason to avoid the emotional aspect is because money is contentious. A real discussion about money often uncovers something else underneath that is the true issue at hand. In this respect, addressing the emotional aspect of a financial discussion is not to be taken lightly.

The industry has seen something of a shift in this direction to the softer side as there is now more talk about behavioral finance as an important topic at many conferences. Behavioral finance covers a wide range of topics and includes a growing awareness of a fundamental crisis that is often seen with today’s savers; that of financial illiteracy. In the U.S., the FINRA Investor Education Foundation funded the National Financial Capability Study and found that almost two-thirds of Americans were unable to pass a basic financial literary test. This shocking lack of financial literacy can be seen across all income levels and often leads to bankruptcies, higher divorce rates, inadequate planning for the future and families failing to pass down wealth to their succeeding generations

Many advisors these days are older males and come from a generation that didn’t talk about their feelings. These advisors tend to have a mathematical inclination and are good at investing but less proficient at emotionally connecting with clients and especially with the next generation. Advisors need to engage clients in a meaningful money and feelings dialogue. The conversation also needs to take into account differing comfort levels of each family member concerning financial matters. Occasionally, some people won’t ask financial questions because they may be worried about sounding naïve or silly so the discussion needs to take these factors into account. Somewhat surprising though, is that the money mindset of many millennials can often be fiscally conservative relative to their parents. Millennials saw their parents go through the financial crisis and lose some of their retirement savings. They don’t want to do what their parents did.

When it comes to families, one of the biggest reasons that wealth hasn’t been successfully passed on to the next generation is because of poor family communication about finances and a lack of preparation for heirs. This in turn comes back to the fundamental lack of financial literacy. Furthermore, as with money, talking about death is a societal taboo. Parents need to have the discussion with their adult children and an advisor can help make the connection. Children can be encouraged to understand that advisors are also there for them, not just for their parents.

Technology is making inroads into the investment industry by way of robo advisors. This is a great opening for advisors with a skill set that computers have yet to match; the emotional aspect of investing. Robo advisors are a great differentiator for the human advisor as robo advisors can crunch numbers but investing is not all about transactions. Advisors who are skilled in managing both the highly useful technical aspect of new robo technology and building long-term relationships with clients will have a large niche to service.

Advisors often see clients who want to close or move their accounts because of a fear of the market. People’s reticence to talk about their feelings concerning money can be damaging over the long term. In fact most people would rather discuss politics or death rather than personal finance. Clearly there is a very real need for the softer side of investment management skills which is a great opportunity for those able to fill the gap.