The Value of an Advisor Part 6: Behavioral Coaching

For such a data-driven and somewhat stiff and boring industry, finance never ceases to amaze in its capacity to evoke raw, real emotion in individuals who depend on it to improve their account balances and material quality of life. In fact, many studies show that there are very few things in life that stir emotions more than money and investing. Vanguard research and other academic studies have concluded that behavioral coaching can add 1% to 2% in net average annual return to client investment returns.

Protecting Your Portfolio from Emotional Reactions

Simply put, behavioral coaching is working with clients to protect their portfolios from emotional reactions. These emotional reactions range from the desire to chase the next hot stock to the fear that drives the wish to move their portfolio to safer assets during market declines. Abandoning a planned investment strategy can be very costly, and research has shown that the most significant culprits are behavioral: the allure of market-timing and the temptation to chase performance. In fact, the mutual fund giant Vanguard recently released a study showing that investors who deviated from their initial portfolio allocations trailed the blended index by 1.50%. Individual investors are well aware of these time tested principles, but the hard part is sticking with them in the best and worst of times.

During the depths of the financial crisis that stretched from the fall of 2007 to the spring of 2009, I personally witnessed several clients who let their emotions get the best of them and make mistakes that will permanently damage their economic well-being. Conversely, the time in my career where I was able to deliver the highest value to my clients was when I was able to convince them to stay the course and avoid making portfolio changes due to market volatility. Have no doubt, I am not alone. I get the feeling that if advisors were asked, and gave honest answers, they too would conclude that preaching calm in times of equity market distress, or euphoria for that matter, is their single most important endeavor.

The evidence is clear: an advisor who builds strong relationships and endeavors to help clients keep emotions out of investing is able to deliver significant value.

Look for our next blog posting where we discuss spend-down strategies.If you have any questions about implementing a cost effective portfolio, contact Claris.

Read Part 1: 7 Strategies to Quantifying Value
Read Part 2: Asset Location
Read Part 3: Asset Allocation
Read Part 4: Cost Effective Implementation
Read Part 5: Rebalancing

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