Tips on empowering clients during the crisis
Based on insights from a series written by Amanda Levis, PhD, Center for Analytics & Innovation (CAI)*, Advanced Experimentation Team.
The mind is a powerful tool; skilled at the art of self-deception to preserve our sense of control and promote self-confidence, even when events are entirely unpredictable1. When something threatens that sense of control, like the health and financial perils posed by Covid-19, we have two options: surrender to the feeling of hopelessness, or take action2.
Taking some form of action to modify a threat has been found to boost confidence in one’s own efficacy and may even reinstate feelings of control to regular levels3. Put simply, doing something makes us feel better and helps us cope with our new, uncertain reality. Doing more regular exercise and eating healthier are prime examples of coping mechanisms when confronted by a health risk like the Covid-19 pandemic. The same principle applies to one’s financial wellbeing, but taking action in response to market turmoil may in fact be more detrimental to long-term objectives and result in derailing a concrete investment strategy.
Advisers may find their clients wanting to wield control over asset allocation and take an ill-advised decision as they grapple with the growing sense of helplessness amid the market turbulence. Knee-jerk reactions are rarely conducive to long-term goals, but in light of the psychological benefits of ‘doing something’, there are some inconsequential actions a client can take to satisfy their desire for affirmative action.
Recognising this natural reaction, advisers can encourage clients to be proactive to boost confidence while safeguarding their portfolios from any long-term damage. Below are some tips for navigating the balance between short-term, emotional impulses and long-term financial objectives.
Make passive feel active
Using different language to explain something can help achieve the desired effect. For example, “doing nothing” and “staying the course” can also be communicated as “fighting the impulse to act without reason” or “pushing against the wave of panic”.
Ask clients to share their decision to fight the impulse to act with other investors. Not only does a written endorsement of a particular strategy strengthen psychological commitment, offering advice can also enhance perceptions of one’s own control4.
Provide concrete actions to take
When a client appears particularly anxious, they may be more receptive to actionable suggestions, such as updating their account information and documenting exactly how the current crisis has affected them financially, for example. By recording such information, clients may feel they are taking a more active role and satisfy their desire to do something.
Advisers could then reinforce feelings of efficacy and competence in clients by offering positive feedback on actions taken5. For example, dissecting the benefits of their decisions and confirming support for the rationale behind them.
Focus on factors they can control
Emphasise the volitional aspect of plan modification. If extending their investment horizon is feasible, frame this option as an active choice they can make to get themselves back on track.
Finally, if a client appears determined to reallocate in a way that would be personally harmful, respect the psychological factors at play. Consider recommending a substitute, small-scale reallocation (i.e. a change that is nearly inconsequential), rather than urging against reallocation altogether.
Help the client achieve feelings of control through you
Threats to perceived control lead some individuals to place greater trust in a leader, group or institution that appears particularly powerful or competent6. Advocating your organisation’s expertise can help promote feelings of control.
A future instalment of this behavioral insight series will focus entirely on how advisers can demonstrate their value.
*The Center for Analytics and Insights (CAI) supports Vanguard’s analytics and research needs. The CAI produces advanced analytics ideas and solutions, performs and synthesizes market and usability research, and promotes analytics enablement across the enterprise.
1 Langer, 1975
2 Rothbaum et al. 1982; Skinner, 1996
3 Landau et al., 2015; Gal & Lazarus, 1975
4 Peluso et al., 2017
5 Bandura, 1977; Connell & Wellborn 1991
6 Kay et al., 2008
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