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Behavioural Coaching – The Key Tool in the Financial Adviser’s Toolkit?

Published: May 11, 2016 by Rob Macdonald, Fundhouse

We recently ran discussion forums around the country on Behavioural Coaching. These sessions were very insightful and in this article Fundhouse’s Rob MacDonald speaks about some of those insights as well as insights from international research around the benefit of an IFA applying a coaching approach with their clients.

The investor behaviour penalty is as high as 8% per annum

This phenomenon of selling cheap and buying expensive, and the resultant locked in loss of value is not unique to South African investors. The recent Dalbar Quantitative Analysis of Investor Behaviour (2015) highlights that US investors continue to suffer the consequences of the investor “behavioural penalty”. This penalty essentially captures the difference in return that investors actually get versus the funds that they are invested in. The 2015 Dalbar Analysis shows that over one year the average equity fund investor in the US was about 8% worse off than the S&P 500 Index, and the staggering statistic is that the magnitude of this annual deficit was similar over a 30-year period.

Despite investor education, investment returns still determined by investor behaviour

As the Dalbar Analysis comments: “No matter what the state of the mutual fund industry, boom or bust: Investment results are more dependent on investor behaviour than on fund performance. Mutual fund investors who hold on to their investments have been more successful than those who try to time the market.” The report continues: “After decades of analysing investor behaviour in good times and in bad times, and after enormous efforts by thousands of industry experts to educate millions of investors, imprudent action continues to be widespread.”

Poor investor behaviour is due to greed and fear, cognitive errors and peer pressure

In a series of recent Discussion Forums with IFAs facilitated by Fundhouse, the immediate and consistent explanation for this phenomenon was “greed” and “fear”. Investors get emotional, and these emotions are linked to the cycles in the market, and when markets are high (expensive), investors get greedy and buy; and when markets are low (cheap), investors get fearful and sell. This behaviour is the complete antithesis of the advice given by the world’s greatest investor, Warren Buffett, who says you should buy when others are fearful; and sell when others are greedy. There is no doubt that emotion does play a huge role in investor behaviour, but as I suggested in a recent article, it is not just emotion that is the problem for investors, but cognitive errors and peer pressure play a big role in ensuring that investors remain their own worst enemies. These three factors coalesce in what I like to call the “Bermuda Triangle of Investing”.

Advisers are in the behaviour modification business, so behavioural coaching is key

What can financial advisers do about this? Well the good news is that advisers can have a significant impact on client behaviour. Vanguard released a paper in which they quantified the value that a financial adviser can add to the return on a client’s investment portfolio. They suggest that as much as 3% pa can be added by the adviser’s “alpha” and their estimate is that as much as half of this can be added through just one of the seven tools they believe an adviser has in their “toolbox”, namely “behavioural coaching”. Interestingly in our Discussion Forums, some advisers suggested that this is even an underestimate of the value that this coaching role can play. Similarly, Don Phillips of Morningstar wrote about the five lessons he had learned in 25 years in the industry, and stated that the key lesson is that “we are not in the money management business, we’re in the behaviour modification business”.

Behavioural coaching enables advisers to go beyond just providing expert advice

So what is behavioural coaching? Erik de Haan, in a book entitled “Relational Coaching” puts it that there are three types of interventions that one can have in a one on one professional engagement: one is to provide “expert advice” and this is usually based on knowledge and technical capability and is a fairly “superficial” intervention from an interpersonal perspective; the second is to provide “coaching” in which issues around communication and relationship are often the key points for consideration, and the intervention is a little “deeper”; and finally there is “therapy” where issues around personal motives, conflicts and internal resistance may be dealt with, and the intervention is even “deeper” than coaching. Clearly financial advisers operate in the domain of “expert advice” and “coaching”, and hopefully when they think a client needs therapy, they refer the client for therapy and don’t try to offer it themselves.

Coaching focusses on the client and enables clients to manage their own behaviour

When providing expert advice, financial advisers are in a sense using their expertise and knowledge to solve a client’s financial planning problem. The focus of the adviser’s attention is ideally on the problem at hand. For example, whether the client should invest in a unit trust or a retirement annuity. In contrast, the focus of coaching is on the client themselves, rather than their problem. In this regard, the UCT Centre for Coaching offers this insight: “A successful coaching outcome is when clients become unstuck from the assumptions that have locked them into seeing the world in a certain way and they are released to explore new and different ways of encountering their lives.” In effect, the financial adviser, through coaching their client, provides the client with the insight and support to manage their responses to their financial situation and their investments in particular.

Key role of advisers: anticipate, diagnose and manage client discomfort and regret

As Daniel Kahnemann, winner of the 2002 Nobel Prize for Economics for his work in Behavioural Finance puts it; financial advisers are responsible for “The anticipation, diagnosis, and the management of client discomfort and regret.”

Anticipation is about imagining the future and possible responses to good and bad news

In anticipation, the adviser needs to try and help the client imagine how they will respond to future events, and put in place mechanisms in calm times in anticipation of rougher times. For example, the Global Allianz Centre for Behaviour Finance suggests that advisers could:

1. Help clients understand the sometimes impulsive nature of investment decisions. This often the result of cognitive errors, not just emotions.
2. Discuss and agree upon what action would be taken when, for example, the markets move 25% up or down. Apart from an emotional response, the real risk is responding to peer pressure and the temptation to join the herd.
3. Draw up a commitment memorandum with both client and advisor as signatories. This commitment memorandum is a key instrument to refer back to when times are tough and the client is experiencing strong emotions, be they greed or fear.


Diagnosis requires effective conversations of which there are three types

When diagnosing a client’s situation, how a financial adviser conducts a conversation with a client is very important. James Flaherty, in his book entitled “Coaching – Evoking Excellence in Others” suggests that three types of conversations happen when conversing with a client. If we apply Flaherty’s insight to financial planning, the first is a conversation for Relationship, in which the adviser engages with the client to understand them as a person, their circumstances, their history, their relationships, etc. The second conversation is for Possibility, in which the adviser and the client explore possibilities for what they could do given where the client is at and what they want and need. The third conversation is for Action, in which the adviser and the client agree on actions that need to be taken. These conversations obviously don’t happen in three discrete parts, but they merge into one another as a conversation unfolds.

No matter the conversation, accurate diagnosis requires effective listening

Flaherty argues that as a coach, you want to spend most of your time in a conversation for Relationship (60-70%), less time in a conversation for Possibility (20-30%); and the least time in conversation for Action (10%). In some ways, this is counterintuitive when dealing with someone who has come to you for financial advice, and needs your expert input. But the research shows that in any type of coaching, counselling or psychotherapy type intervention, the success of such an intervention is not dependent on the expertise of the practitioner or the quality of the advice or input they give. The success is based on the quality of relationship between the coach and the client. Hence the importance of the conversation for relationship when diagnosing your client’s situation, and obviously the most important skill to practice to ensure an accurate diagnosis, is listening.

The success or otherwise of client management is dependent on communication

When it comes to client management, from a coaching perspective, the key tool is communication. Research repeatedly shows that a client’s experience of financial advice is most impacted by communication. Some key ways to describe effective communication would be clear, consistent, and frequent with the golden rule being that it is all about the audience, in this case, the client. Ideally a client will hear from you as often in good times as in bad. More communication is better. And most importantly, through communication, an adviser can continually challenge the assumptions a client may have about investments, and educate them about the realities of markets. As Warren Buffett puts it, in the short-term the market is a voting machine, and people very often vote very unintelligently, but in the long-term the market is a weighing machine, and it is the weight of economies and companies that ultimately determine sustainable investment returns.

Behavioural coaching is key to the effective implementation of expert advice

By seeing yourself as more than an expert adviser, but as a behavioural coach as well, perhaps you will be able to help client’s resist the temptation of wanting to invest in a fund at the top or disinvest at the bottom of its performance cycle. There can be little doubt; through behavioural coaching the adviser has a greater chance of their expert advice being adhered to for the long-term. Put another way, behavioural coaching is the key tool for advisers to help save clients from themselves.