Financial advisor prescription by Statman evokes strong response

“Teaching clients the science of human behavior” is how financial advisors can help clients to overcome the fears that prompt bad decisions, writes Meir Statman in “Client fears and financial advisor services,” his guest post on my blog.

That may be easier said than done. As financial technology blogger Bill Winterberg said, “For a minority of clients, I think teaching the science of behavior may work in changing habits, but for the overwhelming majority, primitive survival instincts are seemingly impossible to counteract.”

I asked some experts–Rick Kahler, Justin Reckers, and Kathleen Burns Kingsbury–to contribute brief reactions to this controversy. Here are their responses.

Kahler: Partnering with a financial psychologist helps

Based on my experience with financial psychology, it is doubtful that all it would take for most investors to change their financial behaviors when feeling fear is more information about how the brain works. While more information will be enough for some investors to change their destructive, it really won’t help the majority.

Changing harmful financial decisions is similar to changing the behavior of any addiction. More information on alcoholism won’t be enough to change the destructive behavior of most alcoholics. Knowing you have a drinking problem is certainly the first step, but “knowing” isn’t “doing.” The same principals go for over-eaters or over-spenders. More information is rarely enough.

It takes a deeper “re-wiring” of the brain to create new neuropathways to change the manner in which we respond to difficult emotions, like fear. There are many tools available to help people do this, the most well-known being various forms of psychotherapy and group psychotherapy.

This is an example where a financial planner who partners with a financial psychologist can have such a positive impact on hurtful financial behaviors.

Rick Kahler is president of Kahler Financial Group in Rapid City, S.D. He writes the Financial Awakenings blog and is a pioneer in the evolution of integrating financial psychology with traditional financial planning profession.

Reckers: Professionals who work directly with clients will make the practical breakthroughs

I think an understanding of the science of human behavior is valuable in any setting. I do not believe “teaching clients the science of human behavior” will do much to counteract economically “irrational” behavior in financial decision-making. This is especially true when the decisions are made in the midst of emotions like fear or greed. Emotional biases are difficult if not impossible to dispel. They often require an advisor to adapt their own behavior to help work with the client’s emotional decision-making rather than try to change them. Advisors must remember that the fear exhibited by their clients is a reflection of the individual’s financial reality. I agree with Statman when he says “the fear of clients is normal.” I also believe one of the most important functions of an investment advisor is to help clients make fully informed decisions whether beset by fear or not. So I do not think the term characterizes what we should be concerned about. We will return to bull market territory and the emotions with which advisors contend will shift from fear to greed.

The real revolutionary contribution to Behavioral Finance will be a framework for advisors to apply concepts while working with clients. This framework will be developed by professionals who actually work with clients. The contributions of Statman, the Libertarian Paternalism of Thaler, the Heuristics of Kahneman & Tversky, the experiments and research of Ariely and so on, are amazing, important and exciting. But they mostly miss the next step: application to real individual lives. (Note: I have not read Statman’s book in its entirety. I will.) Otherwise we are left to contemplate whether “teaching clients the science of human behavior” will make any difference in how they actually behave at the moment of truth. I believe calculated interactions, interventions and nudges are necessary to truly have a positive effect on the financial decision-making of our clients.

Justin A. Reckers CFP, CDFA, AIF, is director of financial planning at Pacific Wealth Management. He writes with clinical psychologist Robert Simon, Ph.D., in the Practice Builder section of and on their blog

Kingsbury: Rationality vs. “Fight or flight” response

Meir Statman’s prescription for financial advisors is right on the money.  Clients do react, and often overreact, when emotions are involved in financial decision-making.  Numerous behavioral finance experiments, some mentioned in Statman’s blog post, show how rational thought is overruled by a desire to minimize the pain of a financial loss.

Neuroscience tells us that the brain actually processes financial losses differently than gains. This results in clients experiencing the anticipation or actual pain of loss three times more than the joy of a financial windfall.  Scans of the brain tell us that the limbic system, normally accessed during sudden or traumatic events, is used when facing a potential loss. In contrast, the frontal lobes, the part of your brain where rational thought and executive functions,  processes financial gains.  By knowing this science and educating clients about it, financial advisor can help counteract the fight-or-flight response when fear is part of the equation by offering rational, longer-term solutions.

Understanding behavioral finance and the human side of financial advising is paramount to offering client-centric services.  Not only will this knowledge help the advisor in guiding his client, it will empower the client to understand his own psychology and use the advisor more effectively.  Like it or not, all of us are flawed, emotional human beings.

Kathleen Burns Kingsbury is founder and CEO of KBK Wealth Connection, a company passionate about helping financial services professionals and their clients master their money mindset through wealth psychology. She is the author of a new audio program called Creating Wealth from the Inside Out.

How to get a white paper written on a budget

White papers. They’re a great marketing tool for investment and wealth managers. But what if you’re too busy to write and you lack the money to hire someone to craft your white paper from start to finish?

Three strategies suggested by Steve Slaunwhite in his chapter on “Create Your Amazing Buzz Piece” in The Wealthy Freelancer can help.

1.  “Write a very rough draft, no matter how awful.” Then, hire someone to shape up your draft.

2.  Record yourself speaking out loud about your white paper topic. Then hire someone to transcribe your thoughts, which means the person types up word-by-word what you spoke. Another option, which I’ve mentioned in “Investment manager’s secret of regular blogging,” is to use transcription software. Once you have your words in a file, you can edit them yourself or hire an editor.

3.  “Get a freelance writer to interview you.” I’m guessing that Slaunwhite is suggesting that you use the writer’s probing questions to tighten your white paper’s focus before you get the interview transcribed.

Those three approaches get your ideas out of your head and into writing. This is the hardest part for some financial advisors.

Have you tried these techniques? How have they worked for you?

Guest bloggers: 2010 in review

I’m thankful for the knowledgeable and talented professionals who have contributed guest posts to my blog this year.

Here’s a list of guest posts sorted by topic, including client communications, marketing, social media, and writing.

Client communications

Five Tips for Delivering Bad News to Clients by Kathleen Burns Kingsbury
Talking to clients about social investing by Annie Logue


Adding Video into the Communications Mix by Samantha Allen
The Lost Art of the Thank You Card by Suzanne Muusers
My Six Best Marketing Tips for Independent Advisors by Steve Lyons
What’s a tomato got to do with getting your fund discovered? by Dan Sondhelm
Would you like to know how financial advisors are choosing products and making investment decisions in this market? by Lisa Cohen

Social media

Be Compliant When Using LinkedIn Messages by Bill Winterberg
Financial Advisors and Twitter by Roger Wohlner
Generate Quality, Low Cost Leads with Facebook Ads by Kristin Harad
How Seeking Alpha Can Build Your Professional Reputation by Geoff Considine
Investment analysts and social media by Pat Allen


Correct Grammar Errors in Your Writing Quickly and Easily by Linda Aragoni
Making Research Readable by Joe Polidoro

Financial advisor prospecting: Not all non-clients are the same

Getting new clients for your investment or wealth management business is always on your mind. But there are so many prospects and so little time. One way to narrow your scope is to focus on a target market, as I described in “First pick your target market and niche.” A next step is to distinguish between prospects, leads, and opportunities as defined in The Wealthy Freelancer: 12 Secrets to Great Income and an Enviable Lifestyle by Steve Slaunwhite, Pete Savage, and Ed Gandia.

“Don’t confuse prospects with leads,” says the book. “Prospects are individuals you believe may be interested in your services. Leads, on the other hand, are prospects who have already indicated a certain level of interest in what you have to offer.” Moving along the continuum from prospect to client, an opportunity is “a lead who has given you a chance to present your services, discuss a project, or quote a job.”

Action step: Look at your universe of potential clients. How many fall into each of these categories? If you’re short on prospects, do research to build their numbers. Once you’ve got enough prospects, focus on moving your prospects, leads, and opportunities through your funnel.

Follow-up will be the key to your success.

Disclosure: I received a free press copy of this book.

“Escrow Accounts: What’s the Deal?” My article for

Does your escrow account ever cross your mind? Probably not. But forgetting to monitor it can lead to lost money and a big headache. Read the rest of my article about escrow on, the website of the National Association of Realtors®.

Also, if you’re looking for a writer to interview your investment or wealth management professionals and then write an article that will appear with their bylines, please contact me. I enjoy ghostwriting!

Guest post: “Client fears and financial advisor services”

Fear prompts financial advisors’ clients to make bad decisions, as Meir Statman explains in his guest post below. He’s a renowned scholar in the area of behavioral finance, so I’m delighted to receive his guest contribution and a free copy of his new book, What Investors Really Want, thanks to my friends at McGraw-Hill.

Client fears and financial advisor services

By Meir Statman

Many financial advisors encountered clients who were urged by fear to cash all their stocks in late 2008 and early 2009. Today, some advisors encounter clients who are urged by fear to replace stocks and bonds with gold.

Clients are often urged by cognitive errors and emotions to act in ways that damage their long term financial health. In that, clients are like patients who are urged by cravings to smoke or eat more than is prudent. Financial advisors are financial physicians. Good financial advisors listen carefully, empathize with clients fears, diagnose, educate, prescribe solutions, and follow up. Physicians do their work with the tools of science. So do financial advisors who teach clients the science of financial markets and the science of human behavior.

We know from the science of human behavior that we are less willing to take risk when we are frightened than when we are calm. In one experiment, a group of students were offered money to stand before the class the following week and tell a joke. A flat joke can be embarrassing, so it is not surprising that some students who agreed to tell a joke withdrew in fear when the time came to stand and tell a joke. But students who were frightened were more likely to withdraw than students who were not. Half the students in the experiment were shown a fear-inducing film clip from The Shining, Stanley Kubrick’s classic horror film, before deciding whether to tell a joke or withdraw. It turned out that a greater proportion of them withdrew.

Fear misleads us to avoid risk even when it is wise to take risk. Here is an investment game: I’ll toss a coin right before your eyes. If it comes out heads, I’ll pay you $1.50. If it comes out tails, you’ll pay me $1.

We’ll play 20 rounds of this game. Before each round you can choose to participate or sit it out. Ready? Suppose that you have lost three dollars in the first three rounds because all three tosses came out tails. Do you choose to participate in the fourth round or do you choose to sit out?

Three losses in a row would arouse fear in normal investors. Many choose to sit out the fourth round. But there is no good reason to be afraid because the game is stacked in favor of those who play all 20 rounds. In each round we have a 50/50 chance to lose $1 or gain $1.50. Our maximum loss is $20 while our maximum gain is $30. And even if we lose, a $20 loss is hardly catastrophic. Yet brain-damaged players were more reasoned at the game than normal players. Undeterred by fear, brain-damaged players played more rounds of the game than normal players and won more money.

There is a lesson here for advisors and clients.  Fear grips us when we watch our portfolios day by day and see so many losing days.  Fear grips us even more strongly when we watch losses in our portfolios over many months or even years, as happened in 2008 and early 2009.  Fear urges us to sell our stocks and invest the money in gold or put it under a mattress.  The fear of clients is normal, and financial advisors can counter it by teaching clients the science of human behavior.

Meir Statman is the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University, and Visiting Professor at Tilburg University in the Netherlands and the author of What Investors Really Want (McGraw-Hill). His research on behavioral finance has been supported by the National Science Foundation, CFA Institute, and Investment Management Consultants Association (IMCA) and has been published in the Journal of Finance, Financial Analysts Journal, Journal of Portfolio Management, and many other publications. A recipient of two IMCA Journal Awards, the Moskowitz Prize for Best Paper on Socially Responsible Investing, and three Graham and Dodd Awards, Statman consults with many investment companies and presents his work to academics and professionals in the U.S. and abroad. Visit his blog

Guest post: “Be Compliant When Using LinkedIn Messages”

Social media compliance is a big worry for financial advisors, so I was delighted when Bill Winterberg offered to write a guest post on three easy steps to be compliant using LinkedIn messages. I’ve quoted Bill in numerous blog posts and tweets on technology, social media, and tweets because he’s a great resource.

Be Compliant When Using LinkedIn Messages

By Bill Winterberg, CFP®

An earlier post on highlighted a “whopping flaw” in LinkedIn’s messaging system that poses compliance issues for financial advisors. The concern is that no viable solution exists to archive and retain messages using settings on LinkedIn.

I believe that advisors can use LinkedIn messages without violating regulatory requirements, provided they follow the three steps below. The key in all three steps is to leverage an existing e-mail archiving service to capture and retain messages sent via LinkedIn.

Here are three steps advisors can follow to demonstrate proactive compliance when using LinkedIn messages.

1.      Use an e-mail archiving service and use the e-mail address being archived with all LinkedIn messages. If you’re not archiving e-mails today, you’re going to have a challenging time responding to audit requests by examiners. They almost always ask for e-mail communication in one form or another.

2.      Configure your LinkedIn E-mail Notification settings to control how you receive e-mails and notifications. All of your General options should be set to deliver Individual E-mail, as shown below. This will feed all LinkedIn messages sent to you into your e-mail system, so they will subsequently get archived by the service you established in Step 1.

3.      Here is the only part that requires you to do something manually. When you compose new LinkedIn messages−or reply to messages received−you must click the “Send me a copy” check box under your message window. Again, the copy of the message will be sent to your e-mail address that is subject to archiving through your archiving provider.

These three steps will leverage an e-mail archiving service to capture and retain message sent through the LinkedIn messaging system. Upon examination by a regulator, advisors will be able to quickly produce all messages sent using LinkedIn.

Bill Winterberg, CFP®, is a technology consultant to financial advisors in Dallas, Texas. His comments on technology and financial planning can be viewed on his blog at

Brokers, CFA charterholders, and fiduciary duty: Charterholders are not always fiduciaries

CFA charterholders have strong feelings about fiduciary duty. This showed up in responses to my blog post on ” ‘CFA credential implies a standard of care not always upheld,’ says Forbes opinion piece,” which discussed brokers and fiduciary duty. So I’m happy to see that the CFA Institute has addressed this topic in “What’s a Broker to Do? Fiduciary duty and obligations under the CFA Code and Standards (registration required)” by Jonathan Stokes, head of Standards of Practice at the CFA Institute.

CFA charterholders who are brokers aren’t always fiduciaries

Stokes sums up the obligations of CFA charterholders who work as brokers as follows:

Although members and candidates must comply with any legally imposed fiduciary duty, the Code and Standards neither imposes such a legal responsibility nor requires all members to act as fiduciaries. In particular, the conduct of CFA charterholders who are broker/dealers may or may not rise to the level of being a fiduciary, depending on the type of client, whether the broker is giving investment advice, and the many facts and circumstances of a particular transaction or client relationship. (Bold added by Susan Weiner.)

Obligations vary by broker type

Charterholders challenges and obligations vary by broker type, according to Stokes’ article.

Execution-only brokers are not subject to fiduciary duty, but conflicts of interest should be disclosed. “Among the conflicts brokers should disclose are whether they offer different levels of services to all clients and whether they pay referral fees to outside organizations,” writes Stokes.

Retail brokers‘ clients should understand they’re in a relationship with conflicts of interest. I wonder how many grasp this. Clients often don’t absorb the significance of what’s written in a hastily skimmed client agreement.

Stokes says

For those who work in a sales capacity rather than a true advisory role, the client relationship is often based on the understanding that the range of investment advice is limited to that firm’s proprietary products or to other firms with distribution agreements with the brokerage firm…. Where the client agreement clearly states the nature of these conflicts, the client is deemed to understand that he will receive selective and potentially conflicted investment advice.

Institutional brokers “pose a particularly challenging area for application of the Code and Standards,” says Stokes. He notes that “disclosure of all relevant transaction details, including costs and commissions, is essential.” Moreover, “With multiple clients’ interests and objectives at stake, the institutional broker must remain impartial and reconcile (to the best of his or her ability) any conflicting client directions.”

Reader challenge: What’s the writing lesson from Physicians Mutual?

You’re getting smarter about writing investment and financial communications, so I’m giving you a challenge: watch this video and then tell me what lesson it teaches writers.

I look forward to hearing from you!

Guest post: “Would you like to know how financial advisors are choosing products?”

Investment marketers want to know what’s driving financial advisor behavior, so I asked  Lisa Cohen, CEO of Momentum Partners, for a guest post.

Financial advisors, what do you think of the RepThinkTank findings that Lisa discusses? Are you–like the advisors whom she mentions–planning to increase allocations to emerging markets and international stocks?

Would you like to know how financial advisors are choosing

products and making investment decisions in this market?

By Lisa Cohen

We thought you might. We did too. The recently-released first report in the RepThinkTank Distribution Dynamics series provides comprehensive information on investment selection and asset allocation trends. The study includes data from more than 1,000 financial advisors across all channels.

Key findings include:

  • Continued commitment to a short list of top managers and families (American Funds, Franklin Templeton, PIMCO), and
  • High regard for growing managers including Davis Investment Advisors, Ivy Investment Management, First Eagle Investment Management, and Thornburg Investment Management
  • Plans to increase allocations to Emerging Market Equities and International Core, among other asset classes, and to slightly decrease exposure to fixed income
  • Changing risk/return expectations and the financial crisis are a top driver of recent changes in the asset allocation of client portfolios
  • Advisors’ median allocation across all channels to passive investments is 20%. Data suggests a growing appreciation for using passive investing as both a core allocation and as a way to adjust investor exposure to specific asset classes.
  • Use of third party portfolio construction tools by nearly a third of advisors in all channels. In light of advisors’ anticipated increase in use of mutual fund wraps, this data suggests the continued outsourcing of asset allocation.

The complete report is available from any of the RepThinkTank partners and is priced at $7,500. RepThinkTank is an experienced, integrated team of leading financial services research, advisor practice management, and advisory firms. Learn more at You can contact Lisa at 866-995-7555.