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When Good Clients Make Bad Decisions


Johnny Depp, star of “The Pirates of the Caribbean” films, is $40 million in debt and is suing his former financial advisors, alleging a breach of fiduciary duty led to his problems. The advisors paint a much different picture.

They claim Depp had an out-of-control spending problem that was costing him more than $2 million per month. His lengthy list of extravagant purchases includes 14 homes around the world and a 150-foot luxury yacht.*

Whether Depp or his former advisors are at fault for his financial woes will be determined by the court. But one thing is apparent: Depp’s personal spending did not help his situation.

Odds are you’ll never have a client with a spending problem on the level of Depp’s. But, if you haven’t already, you could have one that threatens the long-range plan you’ve worked so hard to build by clients “going with their gut.” After all, the only thing predictable about people is they’re completely unpredictable.

That premise forms the foundation of Behavioral Financial Advice, an interdisciplinary school of thought developed by coaching and consulting firm think2perform that links investing with neuroscience and psychology to understand why investors sometimes make irrational decisions with their finances.

While the basic tenets of Behavioral Financial Advice have been around for decades, the principles have gained traction in recent years as advisors see more clients reacting to market volatility and changes to the global economy. Also, in light of regulations such as the Department of Labor’s fiduciary rule, many advisors are incorporating Behavioral Financial Advice into their business model as a way to increase the value they provide clients.

“I’ve been in this business 30-plus years, and the investment and financial planning side is relatively easy when compared to dealing with clients’ emotions and expectations,” said Scott Bordelon, a CERTIFIED FINANCIAL PLANNER™ professional, an Accredited Asset Management Specialist and president of Financial & Investment Management Advisors in Covington, Louisiana. “At the end of the day, you might be great at financial planning, investment management or selecting investments, but if you’re not being effective in the way you’re helping your clients, that doesn’t mean a whole bunch.”

Like Bordelon, Lance Harshbarger, a CERTIFIED PROFESSIONAL PLANNER™ professional with a practice in Overland Park, Kansas, said having an understanding of products is only the beginning when it comes to helping clients build a successful financial plan.

“The investments are critical. I don’t want to undermine that,” Harshbarger said. “But what’s important to the success or failure of any individual family is not whether they owned mutual fund A over mutual fund B. It’s their behavior as an investor that’s ultimately going to determine whether or not they make it to the destination they have in mind with their retirement plan.”

By earning his Behavioral Financial Advisor certification, Harshbarger said he’s better equipped to guide clients through the decision-making process, increasing the overall value his firm provides.

“I will say this has been money well-spent,” Harshbarger said. “It’s an intangible. It’s a discipline that is hard to describe. It has to be felt. It has to be walked through. You have to actually do it, and you will immediately begin to see how you can incorporate and improve your practice using this.”

Continuous exposure to negative news in newspapers, on the internet and on television can fuel clients’ anxiety, increasing the importance of having an advisor who is trained to guide them through emotional ups and downs.

“They’re concerned about what they’re seeing in the headlines,” Harshbarger said. “They’re concerned about the integrity of their overall plan, and a behavioral financial advisor is able to help them step back, get control of those emotions, remind them of why the plan exists and walk them through a credible process that strengthens the relationship where their behavior will change and they’re making wiser decisions.”

To equip its advisors with the skills needed to steer clients away from decisions that could derail their long-term financial goals, Securities America now offers Behavioral Financial Advice certification workshops. Advisors can earn their Behavioral Financial Advice certification online at
think2perform.com.

Kirk Hulett, Securities America executive vice president of strategy and practice management, said live workshops give participants the opportunity to learn from each other and share their experiences.

“Securities America is going all-in on Behavioral Financial Advice. We strongly believe Behavioral Financial Advice paired with expert financial planning and investment management is the model for the practice of the future,” Hulett said. “Because the course is about recognizing, understanding and responding to emotions and behavior, we knew the best setting was where advisors could practice the techniques in-person with other professionals before working with clients.”

Several of the course participants said the training will play a vital role in the future of their firm as the industry shifts its focus from simply selling investment products to providing broad-based service to clients.

“Advisors who lack the skills to coach clients considering potentially costly decisions are doing a disservice to the client, the advisor’s practice and the financial industry as a whole,” said Randall King, CEO of King Financial Partners in Fort Worth, Texas.

“There are people out there saying they’ve had no help, who don’t have professional people who have helped them stay the course and provided them with information that can help them navigate through those waters of accumulation initially and then income later,” King said. “That is not being done.”

With both interest rates and inflation forecasted to increase, clients must position their assets to ensure they have the liquidity to weather any storm. Unfortunately, for many who have made financial decisions based solely on emotions, there will be substantial consequences down the road.

“When this thing turns, and it will turn soon, a lot of folks aren’t going to be able to retire or take care of themselves when they’re old or leave their children or their grandchildren any legacy at all,” King said. “Those are the stakes we’re talking about here. So being able to communicate simply and effectively to people with the tools this course provides us is priceless.”

 

*“What’s Eating Johnny Depp’s Finances? Ex-adviser blames ‘irresponsible’ spending,” Tobias Salinger, financial-planning.com, Feb. 1, 2017