Finance

Behavioral Finance Approach Helps Advisor Calm Clients

The field of behavioral finance, which applies psychological principals to how people behave with their money, is growing. The field attempts to understand why people make particular decisions about their personal finances even if those decisions can be considered irrational.

Stephen Johnson, who has been a financial advisor for nearly four decades, finds the theories of behavioral finance useful in working with clients.

“I think the role that I play in many situations is to have a calming effect on clients at times when the market is volatile,” he said. For some clients, that could be only once every two or three years, “but when those situations occur, you’re going to need someone to talk to who understands your situation and understands you from a behavior point of view as to what your tendency is. Do you panic or not panic?”

Investors who use robo-advisors or attempt to manage their money by themselves don’t have the advantage of such a calming presence.

“They don’t have anyone to talk to when those difficult times arrive, which is usually when mistakes are made in the finance world,” Johnson said, recalling that in 2008, he was able to convince many clients to keep their money in the stock market, and they were able to catch the rebound the next year.

rjq800x200Johnson, an Accredited Investment Fiduciary (AIF®), is branch manager of the Raymond James Financial Services, Inc., office in Draper, Utah. The office has two specialties. One is private wealth management for families, individuals, and business owners. The firm provides a holistic approach for these clients, helping not only with money management but also referring them to specialists for legal, tax, or estate advice if the client needs that kind of assistance. The office has about 260 households with $350 million under management. While most clients have at least $250,000 to invest, Johnson doesn’t have a firm minimum because his ultimate goal is to help people.

The firm’s other specialty is fiduciary consulting and investment advisory services for 401(k) plans, managing about 50 plans with a total of $652 million in assets. Like Johnson, all team members have the AIF® fiduciary designation.

With his long tenure in the financial services industry, Johnson has gained perspective on many subjects that concern investors. One is the importance of having an advisor who is a fiduciary, acting only in the best interest of the client. Advisors who don’t have access to unlimited investment options, or who have an incentive to push clients to one product over another, have an inherent conflict of interest, he noted. He points to a new client he just met whose rollover IRA had been in a fixed annuity for 15 years.

“I guess he’s in that insurance product because the advisor he was working with was an insurance agent, and that insurance product was the only investment that particular salesperson could offer,” Johnson said.

draperteamJohnson has also worked through the huge advance in technology the industry has undergone, bringing both good and bad with it. He started in the field working for E.F. Hutton, and he remembers the days of waiting for research reports to be delivered by mail. Nowadays, he noted, investors can find all the information they want immediately with the click of a keyboard.

Using sophisticated software from Raymond James, technology allows Johnson to provide very customized strategies for all his clients. Goal planning and monitoring software takes into account individual data including income, possible inheritance, time to retirement, and calculates the probability clients will reach their goals based on a number of different scenarios.

“We can create new what-if scenarios for the client. Every single plan is different and customized to the client. We can run scenarios that will say, for example, what happens if you have a long-term care need for several years. If a scenario indicates there could be a serious detriment to their long-term plan, we’ll discuss if we should insure that risk away,” Johnson said.

While technology is highly useful as a planning and education tool – its “blessing” aspect in Johnson’s eyes – it does bring a “curse” as well.

“The curse is a continual short-term focus on performance. People can look at CNBC, CBS MarketWatch, or other websites any second of the day and know exactly where the market is, what every stock is doing, but they’re being bombarded by opinions and predictions.”

Instead of focusing on how indexes like the S&P are doing, he would like clients to concentrate on the rate of return they need and how their portfolio is doing. He’d really like clients to quit checking weekly, or even quarterly, and instead focus on long-term goals.

Johnson is all for simplifying prospectuses and other literature for investors, but he has found that fact sheets published by most mutual funds are a good way to educate clients about funds they are considering.

“Most mutual funds now create a very nice one-or two-page sheet on the fund, listing the objective, the team, the management experience, the fee structure, and the performance. It’s very, very clear, and I think that really simplifies the prospectus approach.”

The real satisfaction, however, has come from helping clients.

“I’ve worked with clients long enough now that many of them are in retirement, and I’ve helped them educate their children or to do the things they care about by helping them to manage their money. That’s why I do what I do.”

For more information about Raymond James Financial Services, Inc., Draper office, visit raymondjames.com/draper

Opinions are those of Stephen Johnson and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Any information is not a complete summary or statement of all available data necessary for making an investment decision, does not constitute a recommendation, and does not purport to be a complete description of the securities, markets, or developments referred to in this material.

166 E 14000 S, Suite 110 Draper, UT 84020 and (801)553-8999 Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment Advisory services offered through Raymond James Financial Services Advisors, Inc.

 

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