Coaching Clients to Ride Market Waves

Don Bennyhoff is the founder of Bennyhoff & Co., a fractional-CIO consulting firm for financial advisors.

Jeff Benjamin: How important is investor psychology in times of extreme market stress?

Don Bennyhoff: It’s the most important factor in all markets but becomes especially challenging when the market rises or falls significantly. I believe that doubt is the enemy of success and during periods of above average gains and losses, investors often doubt that they’re doing the right thing. That’s why the proactive behavioral coaching we espouse is so important. In my opinion, investor success is dependent on investor behavior rather than investment products.

JB: What is proactive behavioral coaching?

DB: To me, proactive behavioral coaching is much like coaching in sports: to help prepare the players for success when game-time arrives. But to be successful in that moment, whether in sports or investing, the players have to be well-coached in advance.

Most advisors engage in behavioral coaching with their clients, but they tend to do so reactively after a big decline, rather than proactively, well-in-advance of the next big thing.

JB: How is that different than behavioral finance?

DB: Learning about behavioral finance often felt more like a vocabulary quiz than anything else. It expanded my vocabulary but didn’t directly help me become a better writer, if I can draw that parallel.

I view proactive behavioral coaching as the most effective application of the insights that behavioral finance offers. For example, people tend to be overconfident, which can result in overly optimistic expectations.

Clients think they know that U.S. stocks return about 10% per year and when they don’t, they’re shocked. In reality, U.S. stocks rarely post annual returns within a few percentage points of their long-term average. Ensuring clients are aware of this at the beginning of the relationship can save them a lot of anxiety over time and that is one simple example of proactive behavioral coaching. 

JB: As an advisor, how do you know if and when behavioral coaching is working?

DB: In my experience, there’s no simple answer to that question.

Proactive behavioral coaching strategies should be adaptable to the individual client, since what works with some clients won’t work with all. And that’s a good thing for relationship-building. While the effort itself is intended to curtail investor behavior that is counterproductive to meeting their goals, when done well, it should also increase the levels of client satisfaction, trust and referrals.

If you see an increase in those metrics, an advisor’s proactive behavioral coaching efforts are likely the catalyst.

JB: Is it only important to focus on behavioral coaching in times of stress?

DB: Absolutely not. Proactive behavioral coaching is an all-season activity. It shouldn’t focus only on preparing clients for bad days, months, or even years.

When the market is posting big gains, investors can be just as tempted to make changes in their portfolios. This is especially common for clients with well-diversified portfolios, as they sometimes feel they don’t have enough of the best performers. Doubt is as common an affliction in good markets as in bad and I believe that proactive behavioral coaching is the antidote.