via Wealth Professional | April 22, 2014
The biggest issue behind emotionally-drive decision making is when decision makers don’t recognize their own behaviour, suggests one advisor.
Citing a story about a client who invested and lost money in a dodgy real estate investment scheme, despite receiving warnings against doing so, B.C. financial planner Brad
Brain says there are times when an advisor’s hands are tied. Clients will believe what they want to believe and remember what they choose to remember, he says.
“He (his client) put trust where it didn’t belong. He wanted to believe it was true” Brain told WP. “The fact that I was telling him not to do so and he would still invest his money … there was no analysis … no rational reason for doing so. It (the decision) was completely based on emotions.”
Brain said that to this day, the client won’t own up to his mistake and is in denial about the scam and the financial losses incurred. Instead, Brain said, he dwells on minor underperformance on his current investment portfolio.
“Despite the fact that he has self-inflicted losses, he has selectively forgotten that,” said Brain. “Yet, he will get all worked up about incremental short-term deficits on investments that are doing perfectly fine.”
“People never recognize their own behaviour,” he added.
Emotionally-driven decision making – particularly those related to finances – are generally tied to greed (the above example, is a case in point) or fear. And, advisors aren’t strangers to this behaviour.
Toronto-based advisor, Matthew Ardrey of TE Wealth, believes lending an ear is the most effective way to dissipate a client’s concerns over under-performing investments, which could lead to rash decisions, such as unnecessarily restructuring their portfolios or even changing advisors.