Identifying and helping your low composure clients
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The Nedgroup Investments behavioural study revealed six personality archetypes that people tend to cluster around. These personality types can be categorised into two broad groups that are easy to identify, namely high composure and low composure clients.
Identifying which group a particular client falls into can be as simple as asking your client how they feel about a portfolio dropping from R 1 million to R 600k in less than 3 months during the 2020 covid-19 crisis. A low composure client will show (extreme) discomfort, while a high-composure client will appear relatively unaffected and may simply respond with a “that’s markets for you!”.
Although there is a high overlap in communication needs and preferences within these two broad groups, as discussed in the previous article, there is more value to be unlocked by understanding the three types of low composure and the three types of high composure clients. To do this, you need to know where your clients rank on the following key differentiating characteristics:
- Composure: How emotional an individual feels when markets are falling
- Desire for guidance: How much an individual wants to make decisions with a professional
- Comparison Tendency: How much an individual will be affected by under-performing the market or peer group even when their net returns are positive
- Confidence: How comfortable an individual feels with making their own investing decisions
- Familiarity preference: How much an individual prefers using familiar investing options
- Financial comfort: How comfortable an individual is with their day-to-day financial situation
Let’s first get to know three low composure clients namely Sam, Mari and Kgomotso.
Sam is 38, married, has two dogs and a cat and works at a well-established practice as a general practitioner (GP). He has recently bought his family their dream home and was conservative in terms of affordability to ensure their loan repayments don’t impact their lifestyle. They enjoy traveling. Sam is financially comfortable. His bank balance stays in the green, he has a healthy ‘in case of emergency’ fund - invested in a money market - and has the benefit of a dual-income home with his wife working as a high school teacher. Sam’s long-term financial plan, however, is not as healthy as his day-to-day living. He enjoys reading the Financial Mail and comes to you with lots of ideas about the market and investing, but he is also quick to get nervous when one or two headlines are bad. He has certainly built up a strong bias towards the safe and predictable money market fund he uses for saving.
Mari is a 45-year-old mother of three. Her husband is an entrepreneur that goes through the usual ups and downs of owning a business. All three of her kids are in private school, and she gave up her career as an oral hygienist when their third child was born to take care of the kids full time. Her days are full! She is constantly worried about their daily finances and doesn’t have the time – or the head space - between school lifts and helping with homework - to find and consult a financial advisor about setting up a solid long-term plan. She worries about the now and doesn’t feel “clever enough” to have a conversation about her financial situation with an advisor.
Kgomotso is 53 years old with two kids at university, both on bursaries that cover the bulk of their educational expenses. Her son is studying accounting and her daughter is following in her dad’s footsteps by studying law. Kgomotso and her husband recently downscaled their house, as the kids are only home every other weekend. They still have about 7 years of bond repayments left and will most likely need to help their kids furnish their first apartments over the next few years. Kgomotso – still working as a legal secretary - is confident they will manage, although she worries about external shocks to their financial planning. There is so much that could go wrong! She is, however, a very keen news watcher and reader and often calls you about investment performance she saw that is better than hers – even when her portfolio is on the up.
Now, can you tell who is who?
Within the low composure group, it can be as simple as recognizing only one or two differentiating characteristics that is exceptionally high or low to identify the sensitive, stressed or skittish archetype.
- A sensitive client, for example, is financially very comfortable, but also tends to get overly comfortable with one investment vehicle and then struggles to invest in anything else.
- A skittish client is confident, well-read and always aware of how markets and funds - including the neighbour’s portfolio - are performing, while being neutral on financial comfort.
- Our stressed client is not financially comfortable at all and spends time worrying about the day-to-day expenses and lacks the confidence to make decisions.
Using the chart below which illustrates where each archetype ranks from high to low on the differentiating characteristics, can you place Sam, Mari and Kgmotso?
Sam is a sensitive client. He is likely to struggle with investing as he is easily upset by short-term, negative news and tend to gravitate to familiar options. A few things you can do to help Sam is to:
- allow him to keep a part of his portfolio invested in a safety pot of risk-free assets like a fixed deposit;
- only invest the remaining, say 90%, in the appropriate risk profile;
- phase in initial investments per agreed plan, rather than an all at once approach;
- use a familiar solution across his portfolio, like the same selection of asset managers;
- and continually remind him that he has his safety pot.
- take a long-term view of getting her fully invested, breaking her long-term plan into small chunks;
- get her to commit to only one part of the investment plan – one transaction – at a time;
- use familiar fund range for each investment and avoid introducing new ideas as much as possible;
- and most importantly - keep her calm!
Kgmotso is a skittish client. She will raise many “what if” scenarios and questions both with regards to her personal situation and the markets. She will be prone to knee-jerk reactions in market downturns and switching funds if she underperforms. A few things you can do to help her is to:
- focus on the high-level principles of investing;
- prepare her for down-turns at the start of each investment, or while markets are up;
- consider going down one notch from her appropriate risk and rather focus on keeping her invested;
- mitigate the risk of underperforming markets by including passive funds;
- and mitigate the risk of extreme swings and volatility in her portfolio by diversifying well.
In the third article in this series we will explore practical ways to understand the high composure group of clients.
To understand more about the six personality archetypes identified by the Nedgroup Investments research, read the full report here. For information on how to access the financial planning tools available on the Nedgroup Investments website or for a copy of the Carl Richards collection of sketches, contact your relationship manager or log into your online profile.