From now until normal: 7 ways to reframe and elevate the client experience
If normalcy is many months away, how can advisors provide exceptional value to their clients now?
Imagine you are planning a vacation and booking an airline ticket online. Let’s say an online travel website quotes you $400 for a nonstop flight. You decide to think about it for few days. When you come back to the website, you see that the price of the same flight has increased to $500. How does this make you feel? Annoyed, frustrated or mad at yourself?
What if the reverse happened, your initial flight quote was for $600, but when you came back later it had actually dropped to $500. How would you feel about making that purchase? You’d probably feel pretty pleased with yourself, right?
This is anchoring at work.
Anchoring bias is our tendency to focus too heavily on one piece of information when making decisions. In both scenarios, your purchase price is the same, $500. But, your feelings about the decision would be very different depending on the first price you were served. That first price anchored your expectations and influenced the way you felt about the price you ended up paying.
As I’ve shared in the past, behavioral biases are innate, unconscious reactions that influence our emotions and our decision-making. Not only that, they are really challenging to identify and overcome in situations where emotions are running high—especially when it comes to finances. You’ve likely seen many examples of clients getting stressed or upset that could be traced back to an anchor previously set. This post will help you to explain and educate clients about anchoring bias as well as offer some strategies to overcome it.
Everyday Anchors
As always, it’s most effective to begin a conversation with clients using everyday examples. In addition to online searches for flights, hotels or car rentals, anchoring can pop up in unexpected places and color our perceptions in the future. Stores use anchoring all the time to influence your purchases. On the surface, $199 might seem steep for a new sweater but if the tag showed it was marked down from $500, wouldn’t you feel a little smarter about making the purchase?
Recently, a colleague—an avid fisherman—told me about a fishing trip. The first day, they caught 10 fish, huge ones, and ended the day feeling pretty proud of themselves. The next day, and every day for the rest of the trip, they caught less than three fish each day. By the end of the trip, they felt pretty discouraged with themselves, even though my colleague admitted that the overall catch numbers for the trip were higher than usual. They just couldn’t shake the disappointment that followed that big haul on the first day.
Anchors Can Influence Performance Expectations
Anchoring can become dangerous when clients allow anchors to influence their performance expectations. Recently, Franklin Templeton surveyed investors about their portfolio return expectations over a five-year period. The median response was 8.5% annually. But, when presented with a hypothetical market that was up 20%, the median return expectations increased to 15%. The hypothetical strong-performing market anchor caused investors to abandon their initial expectations and expect stronger returns.
It’s one thing to ask investors hypothetical performance questions and it’s another when there’s a frustrated client sitting in your office. In reality, many financial advisors deal with anchored client expectations everyday—I’d argue it’s one of the biggest challenges you face. Clients can get anchored at market highs, which can make a downturn extremely frustrating, and cause clients to lose sight of their long-term goals. The emotions spurred by an anchor can influence clients to make irrational decisions about their portfolios that can get them off track.
How can you keep a client focused on their long-term goals when the markets are designed to fluctuate?
Have a list of predetermined criteria for major decisions. One strategy that some advisors have adopted is establishing a set of predetermined criteria to use before implementing any major portfolio changes. This is particularly helpful during times of volatility. Some refer to this as a client contract or as a letter to their future selves. Ask your clients to determine how much of a drop in the market they’d be willing to withstand before implementing major changes. If they agree that they can weather a 6% dip, but are calling nonstop when the market is only down 3%, you have a good opportunity to remind them of their intentions and goals that they set after careful rational thought and consideration.
Always bring it back to the bigger, long-term picture. Because most clients are investing for long-term goals, the overall big picture can look very different from the day-to-day. If the market hits an all-time high they may feel confidence about their prospects, but when it’s down they may feel like they’ve lost. It’s up to you to encourage them to get off the emotional roller coaster and consistently look at their portfolios in relation to their big picture goals. Acknowledge that anchoring may cause them to feel they’ve missed out or lost, but what’s most important is that they get where they want to go in the end.
Anchors, even the invisible ones, can cause us to get stuck and hold us back from moving forward. Emotional anchors can influence clients to make rash decisions that might affect their long-term goals. Financial advisors can help clients get unstuck from the weight of these emotional anchors through relatable examples and reinforcing their long-term goals. And the more you are able to discuss behavioral biases, like anchoring, with clients, the less likely clients will make unwise decisions in an emotional state.
The views expressed in this article should not be considered investment advice or recommendations to invest in any security or adopt any investment strategy.
