The financial advisor as emotional coach?

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

One of the reasons psychologists can charge $200 per hour to ask, “How does that make you feel?” is because we have become great at putting fancy-pants labels on things that would otherwise be very intuitive. Take for instance the tongue-twisting “affect heuristic,” which is simply a reference to our tendency to perceive the world through the lens of whatever mood we are in.

For example, when giving a seminar on risk assessment, I often ask participants to write down the word, that if it were spelled phonetically, would be “dahy.” Go on, write it down and don’t over think it. It turns out the way you spelled the word has a lot to do with the kind of day you are having. Those that spelled the word as “die” may need a hug, while those that spelled the word “dye” are probably doing fine.

Ask someone having a bad day (those that wrote “die,” I’m looking at you) about their childhood and they are likely to tell you how they were chubby, had pimples, and never got picked first for kickball. Conversely, ask someone having a good day about their childhood and they are likely to recall summers in Nantucket and triple dips from the Tastee Freeze. Memory and perception are moving targets colored by our mood, not infallible retrieval and evaluation machines through which we make unbiased decisions.

financial advisor as emotional coach

So, what is the moral of all of this psychobabble? Think back to the last time you went shopping when you were hungry. Once you’ve brought that to mind, think back on the contents of your shopping cart. If you’re like me, you probably had a whole mess of HoHos, DingDongs, Nutty Buddies and Diet Coke (you don’t want to get fat, after all), but nothing very healthy or substantive.

The same rules apply to any life decision requiring risk assessment; if you try to make decisions when you are happy/sad/angry/in love/anxious/worried/euphoric, you are likely to end up with a life full of junk. When speaking to investors about the affect heuristic, I borrow an acrostic from the addiction literature – H.A.L.T. – which stands for hungry, angry, lonely or tired. The 12 step and other programs encourage those in recovery not to make decisions when they are in any of the emotional states described in H.A.L.T. and this advice is just as sound for investors. You do not view investment risk independent of your emotional state and so making long-term financial decisions in a short-term elevated emotional state should be avoided altogether. For help avoiding excessive emotion, try one of the following:

  • Exercise vigorously
  • Redefine the problem in terms of longer-term goals
  • Limit intake of caffeine and alcohol
  • Talk to a friend or your financial advisor
  • Don’t react right away
  • Shift the focus of your attention
  • Label your emotions
  • Write down your thoughts and feelings
  • Challenge catastrophic thoughts
  • Control whatever aspects possible including diversification and fees

The Center for Outcomes, powered by Brinker Capital Holdings, has developed an educational program to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

Brinker Capital is a privately held investment management firm with $21.7 billion in assets under management (as of December 31, 2017). For 30 years, Brinker Capital’s purpose has been to deliver an institutional multi-asset class investment experience to individual clients. Brinker Capital’s highly strategic, disciplined approach has provided investors the potential to achieve their long-term goals while controlling risk. With a focus on wealth creation and management, Brinker Capital serves financial advisors and their clients by providing high-quality investment manager due diligence, asset allocation, portfolio construction, and client communication services. Brinker Capital, Inc. is a registered investment advisor.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

 

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