Better supporting clients with behavioral finance #1: wealth planning

How important is it to first meet your client and get to know their story ? 

The discovery phase is the starting point of our relationship. We need to know as much as possible to provide our client with tailored wealth management support. There tends to be a culture of secrecy − especially among business leaders. We need to reassure and remind them that their wealth planner is bound by professional secrecy, and that the information collected during the interview is for the sole purpose of crafting a bespoke service.
We start by discussing  their story, their business or product. Once we have established a trust relationship, we address valuation, based on official figures, and this is when the discussion begins in earnest. Business owners tend to be highly absorbed by what they do. They also have very different personalities, from somewhat anxious to much more relaxed. Gradually, we begin to make out their biases. This is where behavioral finance can help us.

What are the most common biases among your clients ? 

The bias we most often see among clients is an inability to see themselves after their working life. Before age 55, business owners are in the heat of the action — caught up in the daily grind and business development, looking no further than a day, a month… or a year at best. After 55, they have built a company, a family and wealth. Their children are grown, and questions around their potential involvement in the business begin to emerge.
In some cases, we see obstacles related to projection bias and “mental myopia” — i.e. not wanting to make any changes. I recall an 80-year-old gentleman, still at the helm of the family business, who refused to discuss handing over the reins because none of his four children met his expectations. Moreover, they were not invited to any of the discussions.
We also often note a “status quo” bias, or the desire to keep things as they are, even if they are not ideal. For example, the second generation, having inherited and grown up with the company’s legacy, wants to maintain everything as is. And then you have the third generation that wants to shake things up, and this creates tension.
Another common bias is divestiture aversion due to overvaluing what one owns. Thus, for some business owners transferring the company is sometimes almost like akin to losing a child, making it a highly complex affair. They fear feeling empty and have a hard time looking forward: “This is the only thing I know how to do; what will I do now?”

What do you suggest to adress these fears and obstacles ? 

After the discovery phase we move onto diagnostics. We listen to the client’s wishes, present the current state of affairs, the figures, and encourage them to think about their future plans.
Using behavioral finance to identify biases and drawing on the information we have, we present the client with alternative paths to what they might have imagined. For example, if a client wants to give everything to their children, we help them ask the right questions, always supporting our reasoning with data.
In summary, we do not present our clients with the best, but with the solutions best suited to their needs. Our role is to tighten the decision framework and narrow down the overabundance of choices, so that they can make the best decisions for themselves and their loved ones.