Better supporting clients with behavioral finance #1: wealth engineering

How important is the phase of meeting and gaining a deep understanding of your client in their support?

The discovery phase of our client and their story is essential in wealth engineering. To help them effectively, we need to know as much as possible. We often face a culture of secrecy, especially among business leaders. We must then reassure them, notably by reminding them that the wealth engineer is bound by professional confidentiality, and that the information collected during the interview will only be used to offer the best possible support.
We start by discussing their story, their business, their product… Once the trust climate is established, we address valuation, relying in particular on public figures, which truly engages the conversation. Business leaders are often very absorbed by their professional activity, and their personalities vary widely, ranging from rather anxious individuals to those who are not anxious at all. It is at this moment that we begin to perceive biases, and behavioral finance can help us.

Precisely, which biases do you most often encounter among your clients?

The most common bias is the inability to project oneself into “after” professional life. Before age 55, business leaders are in the heat of action. Caught up in daily tasks and business development, they project themselves only a day, a month, or a year ahead—but no further. After 55, they have built a company, a family, a patrimony… Their children are adults, and questions begin to arise, notably about whether or not these children will be involved in the business.
In some cases, we also observe obstacles related both to projection bias and “mental myopia,” expressed by a desire to make no changes. I think of an 80-year-old gentleman, still at the helm of the family business, who refused to discuss transfer because none of his four children met his expectations. These children were, moreover, not invited to discussions.
We also often note a “status quo” bias, which manifests as a desire to keep things as they are, even if they are not ideal. For example, very often the second generation, who inherited and grew up with the company’s history, wants to maintain everything as is. Conversely, the third generation often wants to change everything, which creates tensions.
Finally, another frequent bias is the aversion to dispossession, based on overvaluing what one owns. Thus, the transfer of a business is sometimes almost comparable to the loss of a child for a business leader, making it very complicated. There is a fear of emptiness, a difficulty in projecting oneself: “I only know how to do this, what will I become tomorrow?”

Faced with these fears or blockages, what do you propose?

After the discovery phases comes the time for diagnosis. We listen to the client’s wishes, present the current state, the figures, and encourage them to project themselves.
Thanks to the biases identified by behavioral finance and the information we have, we present the client with alternative paths to what they had imagined. For example, if a client wants to give everything to their children, we question this choice with them. We lead them to ask the right questions, always supporting our reasoning with data.
In summary, we do not present the best solution, but the one that is most adapted to their needs. Our role is to narrow the decision-making framework, limit the overabundance of choices, and help them make the best decisions for themselves and their loved ones.