Advisers can also help new clients to build financial self-efficacy, which is critical to cultivating resilience. Recent academic research demonstrates that, for those with low levels of financial self-efficacy, market volatility negatively impacts their financial satisfaction.
Confidence and an optimistic belief in their ability to manage finances during challenging situations can lead to better outcomes and satisfaction. A few tried and tested techniques can help:
1. Set realistic goals.
Designing a plan to manage cash flow equips new clients with the discipline and skills needed to plan for their finances in the future. Using interactive and intuitive tools that break goals down into smaller, achievable targets engages clients in the process.
By understanding their cash flow, a client will be better prepared for periods of adversity. As they make progress towards their goals, they obtain a sense of achievement, which in turn develops their financial self-efficacy.
2. Build confidence.
By praising the client’s achievements, an adviser can build trust and confidence, becoming seen as a financial role model. Our 2020 research project with Henley Business School found that individuals who had previously worked with an adviser were more comfortable with taking risk and generally more resilient, despite the impact of Covid-19 on market volatility.
3. Consider emotions.
Confidence in managing finances can be affected by emotional states. With a holistic understanding of the clients’ emotions, the adviser can determine when they are best suited to making decisions, and discourage them from taking action when they are less equipped to do so.
Agreeing, in advance, on timelines in which decisions will be made will ensure that the client’s focus on an emotion-eliciting solution does not drive investment decisions.
4. Engage regularly.
Regular communication is key to developing resiliency. An initial meeting is just the first step in an ongoing dialogue between adviser and client.
Whether providing relevant collateral or speaking frequently on the phone, it is important for an adviser to stay in touch, particularly in periods of uncertainty.
5. Take a long-term view.
By encouraging the client to consider what has occurred in the past and take a longer-term view of the situation – through cash flow planning, for example – an adviser can help avoid short-term thinking, which often leads to recency bias.
As with all clients, it is clear that the primary concern with a new and nervous investor is understanding their unique investment requirements and ensuring that they are comfortable with the course of action you choose to take together.
By helping clients understand their attitude to risk and capacity for loss, advisers can help ease uncertainty and avoid the risk of ill-thought-out decisions, especially in more challenging investment environments.
