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There are three core things in wealth management that it is unlikely will ever change. Actually, it may be fair to say that there are more than three things, but these three things are ones that appear truly constant.
1. Financial advice is an industry where customers should be given what they really need, rather than what they want.
In most industries, companies take the ‘the customer is always right’ attitude. They give customers what they want, and what they want is not always good for them. Whether you’re selling fast food, cars or beverages, a lot of ‘what people need’ is not always in their long term interests. If companies focused on giving people what they needed instead of catering to what they wanted then some companies would just no longer exist, and others would make far less money.
The thing about capitalism is that it’s good at supporting companies that cater to wants.
Financial advisors need to be taking a different approach when it comes to wealth creation and focusing on giving customers what they really need. You can’t pitch the holy grail because while it’s an easy sell it isn’t something that you can really deliver on. Investors want guaranteed gains, but there’s no legal way to give low risk high reward guaranteed investments.
Investments that promise to give such rewards get a lot of press attention, and cost a lot, but they rarely deliver. They lose clients who become disillusioned and they end up struggling to find new customers. It’s not a sustainable model. If you want to take on lots of clients you need to make sure that they have reasonable expectations. That’s the only way to build a long-term sustainable business.
It is possible to show off a wealth portfolio that would have performed amazingly in the past and use that to seal the deal with demanding clients, but why do that when it will mean that you have to live with that disappointed client for the months that follow?
2. People prefer doing business with people that they like.
As unfortunate as it is, that is one thing that will never change. People prefer to deal with likeable people who listen to them and communicate clearly. They prefer to deal with bright, attentive and compassionate people that want to see them succeed.
If your customers don’t believe that you are that person then you run the risk of losing them, especially given how difficult it is to quantify the performance of a financial advisory company. No financial advisor is going to retain a client if the customers feel that they are not trustworthy or that there is a personality clash.
Wealth advisors will always be important. Technology can make jobs more efficient and can help advisors to offer more services, work with more people, or do an overall better job but at the end of the day what people really want is to be able to talk to people and have someone to complain to, ask questions to, and have explain all that jargon. Machines can’t take the place of all of that. Unlikeable advisors are not going to do well in the long term. You want to make sure that you can build a business that will survive for the long haul.
3. People feel fear and greed and always will.
Humans are always going to feel fear and greed. No matter what investments they are making, those will be major drivers. People may ask about mutual funds, hedge funds, ETFs, private equity, real estate, venture capital, socially responsible products, stocks, shares, commodities, cryptocurrencies, passive or active investments or any one of a dozen other investment instruments and options but what they really want is someone to promise returns and appease their fears of loss. It is fear and greed that are the biggest drivers of all kinds of investment.
The urge to avoid risk and to jump into a bubble or a bull market is one that is hard to beat. It applies to people from all walks of life and could be seen as being a universal instinct. Just like our ancestors who did not have the urge to run away from predators ended up not living long enough to pass on their genes, people who are not smart with their money will struggle too. Research, software, seminars, tutorials and books can teach the theory required to do well when it comes to investment, but it is very hard to beat that urge to protect yourself from risk and to take reasonable steps to get rewards without falling into the greed trap.
As much as we try to deny it, we are all animals, and our brain reacts partly instinctively to certain perceptions of threat. No matter how well educated we are, when it comes to anxiety it is hard to control our instincts. During a period of market correction it is natural to try to concoct different options to get out of the sticky situations we are in.
When you experience pleasure, whatever the source of that pleasure, we are mentally built to want to keep experiencing that. Whether the high comes from drugs, delicious food, sexual activity or a successful trade it does not matter. Our brain wants us to keep doing whatever it is that made us excited. Reason goes out of the window.
No software can overcome greed and fear. It is the job of a wealth management professional to find ways to keep people trading sensibly when those emotions peak so that they can ride out the risky periods and get enjoy the balance of risk versus reward that the client actually needs, rather than the dollar signs that they are responding emotionally to at that moment in time.