Training the Investor Brain: Managing Emotions and Building Your Business

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Advisor Perspectives
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Q3 2019 hedge fund letters, conferences and more

“Is there anything I can do to be more transparent or communicate better?”

That’s one of several questions Dr. Frank Murtha has suggested financial advisors ask to strengthen relationships with their clients. Murtha, a psychologist and co-founder of MarketPsych, and Bob Schmidt, manager of the Brandes Institute, discussed behavioral finance during an Advisor Perspectives webinar called “Training the Investor Brain.” The duo shared more than a dozen specific questions, anecdotes, tools and tactics advisors can use today to help better manage client emotions – and in turn their clients’ money.

“The financial advisor profession is under attack today,” Murtha said. “And the attacks are coming from regulation, robo-advisors and the increasingly popular notion that people can invest successfully on their own.” While some individual investors have shown proficiency with money management, Murtha said many struggle. “And they struggle primarily because of behavioral biases. It’s very, very difficult to stay rational and disciplined over a long-term horizon. And generally people need these traits to do well.”

Murtha has worked with financial advisors and individual investors for 18 years, taking theories about behavior and providing guidance to put the theories into practice. Schmidt has managed the “thought leadership” division of investment management firm Brandes Investment Partners since the Institute’s inception in 2002.

“The lingering question I have about the growing field of behavioral finance is, ‘So what?’” Schmidt asked. “What can advisors actually do with these concepts? How can they apply them to shield investors from missteps and exploit others’ shortcomings?”

In the webinar, the team discussed specific worksheets, handouts and phrases advisors can use with clients to address popular and destructive biases such as fear, short-term thinking and extrapolation.

Among the items available free of charge to advisors[1]:

  1. Bias Alert Guide – a worksheet to discuss specific traps clients may face and how to avoid them;
  2. Stress Management Plan – this is designed to help limit emotion and keep clients focused on the long term;
  3. A dessert plate-sized handout that illustrates the dangers of checking performance too frequently called “Wheel of Investor Emotion” (See the handy user guide too.);
  4. Short article – designed to counter investor preference for stocks in their “home country”; and
  5. A podcast titled “Behavioral Finance – So What?” featuring Schmidt and Murtha.

Murtha also stressed that advisors work not only with clients, but with their clients’ children and grandchildren to help their business flourish across generations. “The Planning Fallacy contends people don’t appreciate how much time and effort it takes to reach a goal,” he said. For example, high-profile construction projects tend to run over budget and take much longer to complete. Similarly, people often fail to see the benefits of starting their investment journey early and sticking to it. This lesson can be valuable for younger investors.

Exhibit 1: Investor Hierarchy of Needs Offers Blueprint for Enhancing Client Satisfaction

Enhancing Client Satisfaction

Schmidt discussed the 10-30-60 Rule. “The rule posits that sixty percent of the money people may withdraw during retirement comes from investment returns earned during retirement. Thirty percent comes from investment returns earned during the working years, and 10 percent comes from their actual retirement contributions during the working years. And the example we use assumes they earn a 7.5% annual return while working and when they stop working. I worry that if people shy away from stocks and increase their exposure to bonds or cash as they age, they may run out of money. People need to plan for getting to and through retirement.”

Read the full article here by by Frank Murtha and Bob Schmidt, by Frank Murtha and Bob Schmidt, Advisor Perspectives

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