InvestmentNews has a nice article by Charles Widger and Daniel Crosby entitled, “What investors really want, need.” In the article they give a short summary of their book, “Personal Benchmark: Integrating Behavioral Finance and Investment Management.” The summary article reads in part:

In reflecting on our experiences as advisers and investors, we’ve come up with what we believe are the key and often unspoken wants and needs of our investors.

Investors bring conflicts to advisers for them to resolve:

• Investors want safety and, on the other hand, growth.
• When markets are volatile, investors want advisers to do something to stabilize the swing in the value of their portfolios.
• Investors want an adequate pool of investment dollars in the future and, on the other hand, to enjoy consumption today.
• When the stock market is high, investors don’t want bonds until the market corrects.
• Investors want equity-like returns without the volatility.
• Investors want to perform favorably against selected capital market indexes while making steady increases in purchasing power.

These conflicting desires and the behaviors they inspire often lead to disappointing and even devastating results. It is our task as advisers to resolve these and many other conflicts for investors.

When we talk with a prospective client, we are always looking for these conflicting desires. And because they can lead to major mistakes, we strive to let the client know when their thinking is wrong.

This is part of the difference between a fiduciary and a salesman.

A salesman can be tempted to sell you whatever mutual fund is most easy to get you to say “yes” to regardless of its long term effect on your finances. If you want safety I can sell you a Treasury bond fund regardless of your need for long term growth. On the other hand if you want growth, I can sell you whatever fund had the greatest growth over whatever past time period you are judging funds by, say 5 or 10 years. And any time you want to change funds I can find something else to sell you.

As fiduciaries, we have a legal obligation to act in your best interest. It is our job to do whatever our clients would do if they had our time and expertise.

That means telling the client that they are wrong.

Tell a client they are wrong is always difficult. But most of our clients are coming to us specifically because they trust us to educate them on what is possible and what is preferable. We have several sayings within the firm to try to help us do the right thing. For example, “It is always a good time to have a balanced portfolio” reminds us that rebalancing is always a good solution to market movements. It will, on average, boost returns and reduce some volatility.

In the sales arena, the saying is, “The client is always right.” It reminds the sales agent that if the client wants dark mismatched plaid wallpaper in their bathroom, the salesman should make the sale.

In our firm we want to remind everyone that educating clients about conflicting wants is one of the most important tasks we can do. So we turn the sales adage on its head and say, “The client is always wrong.”

Clients really aren’t always wrong. They are the only ones who know what their life-planning goals and desires are. And in the realm of bathroom wallpaper it is our job to make sure that their finances can financially support whatever design they desire. In fact the early steps of building the client’s Investment Policy Statement are designed to get to know the client’s situation to craft an appropriate financial plan.

But since our brains are wired the way they are, our first reactions to market movements are always wrong. Often it takes overcoming these reactions to take the most rational course of action.

Prospective clients come to us with a desire to put all their money in gold and bury it in the backyard or else bet it all on the latest biotech company they heard about at the latest cocktail party. They know that neither of those are the right answer, and they are hoping we can take those desires and craft an appropriate asset allocation on the efficient frontier.

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