What clients need most, they may not be receiving.

It has long been held that no sound exists in space because sound waves cannot travel in a vacuum. And most of space is a vacuum. But in 2022, using data from a series of telescopes worldwide, NASA recorded actual sound from a massive black hole 54 million light years away at the center of the Perseus cluster of galaxies. Due to the copious amounts of gas surrounding the black hole, NASA was able to capture actual acoustic waves. As you might expect, the emitted sounds are as ominous and spooky as a sci-fi thriller.

This discovery represents yet another remarkable accomplishment for the space agency. And despite the fact NASA has been pointing its attention to the heavens since it began 65 years ago, its patience paid off as we finally heard a voice from space. You’re likely wondering what this story has to do with your financial practice. Actually, very little, other than the fact it may raise the question, are your clients waiting patiently to hear your voice?

At AuguStar Financial, we understand the delicate balance you must strike between managing investments and maintaining strong client relationships. That’s why we’re here to highlight a concerning trend in the financial services industry—one that could put your client base at risk if not adequately addressed.

The disconnection dilemma

It’s no secret that clients expect more from their financial professionals than ever before. Gone are the days when biannual meetings were sufficient. Today, clients crave regular updates and proactive engagement, and their preferred channels for this communication are clear: phone calls and email.

Here’s where the disconnection dilemma arises: Many financial professionals are struggling to meet these heightened communication expectations due to limitations on time, increasing regulatory requirements, and turbulent market conditions.  The consequences of overlooking clients’ communication needs, however, could be dire. Clients who feel unheard or neglected are those who may simply walk away.

The rise of robo-advisors, investing apps, and the COVID-19 pandemic have brought new challenges and opportunities for client communication. As a result, many financial professionals risk losing clients to other advisors due to a lack of frequent and meaningful communication.

To shed light on this pressing issue, we turn to a recent study conducted by YCharts, which surveyed 671 individuals to gauge their expectations and experiences with their financial advisors. The study offers invaluable insights into client behavior and preferences, highlighting the need for advisors to revisit and revamp their communication strategies.

Clients expect more meaningful connections

The study found that clients’ expectations regarding communication have significantly evolved. The need for meaningful, compelling, and actionable communication from financial advisors has never been greater.

One of the study’s most striking findings is that a quarter of surveyed clients considered switching to a new advisor since the onset of COVID-19, and nearly 22% actually made the jump. Even more concerning is that a larger percentage of higher net-worth clients have made the switch, indicating that clients with more significant assets actively seek better communication experiences.

Why clients leave

While portfolio performance remains a crucial factor in client satisfaction, frequency of communication was found to be a key driver in helping clients understand their investments, with clients who reported being contacted frequently or very frequently understanding 73.3% of meeting material on average, compared to just 63.9% for those who were infrequently contacted.

Furthermore, clients who felt they were contacted infrequently were more likely to turn to social media or other news sources for answers rather than consulting their advisor. This highlights the significant role that frequent and informative communication plays in maintaining clients’ trust and confidence.

The impact of virtual and digital communication

The COVID-19 pandemic accelerated the adoption of virtual and digital communication channels in the financial advisory industry. The survey found that 51.7% of clients reported meeting with their advisors virtually and in person, a considerable increase from 38.2% pre-pandemic. However, the shift towards virtual meetings has raised concerns about reduced face-to-face contact, leading to diminished client-advisor communication.

The study also found that, next to in-person meetings and phone conversations, email remains a preferred medium for client-advisor communication, with 73% of clients preferring updates via email. Text messages have gained popularity, with 35% of surveyed clients indicating a preference for this channel. This underscores the importance of offering various communication options to cater to clients’ preferences.

Client communication is paramount

The aftermath of the COVID-19 pandemic has brought client communication to the forefront of financial advisors’ concerns. The study’s findings emphasize several key points:

• A significant number of clients have switched advisors since 2020, with portfolio performance being a crucial factor in their satisfaction.
• Communication style and frequency play a pivotal role in client retention and referrals.
• Clients under 60 and those with higher net worth are more likely to consider switching advisors.
• Frequent communication reinforces clients’ understanding of their investments and reduces their reliance on external sources for information.

Actionable recommendations for financial professionals

Recognizing the critical importance of client communication, here are four actionable recommendations for financial professionals to ensure they meet the needs and expectations of their clients:

1. Commit to a cadence: Establish a consistent communication schedule that aligns with your clients’ preferences and needs and that you are confident you can sustain. Consider goals such as bi-weekly blog posts, monthly newsletters, or quarterly calls to high net-worth clients.
2. Create new touch points: Expand your communication strategy to include a variety of channels, such as email, phone calls, and possibly text messages, to engage with clients on their preferred terms. This approach increases client comprehension and engagement.
3. Prioritize knowing your clients and their goals: Deepen your understanding of your clients’ financial goals and aspirations. Portfolio performance is essential, but staying abreast of changes in your clients’ lives helps you remain relevant and helps you adjust to any changes in their investment objectives.

Summary

The YCharts study underscores the critical importance of client communication across the wealth management industry. Financial professionals must adapt and improve their communication strategies to meet the evolving expectations of their clients.

By ensuring you provide frequent and meaningful communications for your clients, you’ll be far more likely to retain your client base and attract new clients through positive word-of-mouth referrals.

Lessons from the remarkable journey of Jose Hernandez

In your role as a financial professional, you often serve as a guide, coach, and counselor to your clients. You hold a profound responsibility to shape their financial destinies. While you diligently work to help secure their financial well-being, another dimension to your service should not be overlooked – the power to inspire your clients to reach their most ambitious goals.

To illustrate this, we introduce you to the remarkable story of Jose Hernandez, a migrant farmworker who defied incredible odds to become the first Hispanic astronaut to journey into space. Jose’s story, as chronicled in his book, Reaching For the Stars, and memorialized in film in Amazon Prime’s new movie, A Million Miles Away, is a testament to the impact you can have on inspiring clients to pursue their most audacious dreams.

When Jose was just a child, his father imparted five pivotal steps that guided him toward achieving his lofty goal of becoming an astronaut. These steps hold a treasure trove of wisdom that can be applied to the world of financial retirement planning:

Determine your purpose

Help your clients uncover their true financial goals. Encourage them to envision the retirement lifestyle they aspire to and ask them to reflect on what truly matters to them. Understanding their purpose is the first step to forging a roadmap to their dream retirement.

Recognize how far you are from that goal

Just as Jose acknowledged the vast gap between his migrant farmworker beginnings and the cosmos, your clients must comprehend the financial disparity between their current situation and retirement vision. Realistic self-assessment is crucial.

Draw yourself a roadmap

Collaborate with your clients to chart a financial roadmap and plan for investments, savings, and income sources. Establish milestones and adjust the plan as needed. As you know, a well-structured plan is the compass that will guide them toward their financial goals, and this is the heartbeat of what you do for your clients.

Prepare yourself according to the challenge you picked

Jose Hernandez overcame numerous challenges, such as learning to speak Russian and obtaining a pilot’s license. Similarly, clients may need to expand their financial education. Offer them the knowledge and resources they need to succeed.

Develop a work ethic second to none

Instill the importance of discipline, dedication, and hard work. In financial terms, this means consistent saving, disciplined spending, and making informed decisions about risk management and investment strategies.

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Now armed with a basic understanding of Jose and his father’s 5-step path to achievement, let’s explore his incredible journey and discover how Jose’s actions resonate with the financial journey you’re guiding your clients on.

Overcoming challenges

Jose’s path to space was anything but straightforward. As a child of Mexican migrant farmworkers, he faced economic hardships, discrimination, and language barriers. Despite these obstacles, he remained unwavering in his dream of becoming an astronaut. Similarly, your clients may encounter various financial disappointments and doubts, from debt and market volatility to uncertainty about retirement. By helping your clients remain focused on the purpose in retirement they have defined, you help them overcome short-term anxieties that all clients encounter.

Jose’s dedication to learning and self-improvement can serve as a source of inspiration for your clients. Just as he had to expand his skills to meet the requirements of the space program, your clients may need to acquire new financial knowledge. Encourage them to educate themselves and become well-versed in the investment strategies and retirement plans you have created with them. This enhances your communication with clients and the frequency with which they may engage.

Furthermore, Jose’s journey included passing NASA’s rigorous astronaut candidate training program, which includes successfully completing the International Space Station systems training, extravehicular activity skills training, robotics skills training, Russian language training, and aircraft flight readiness training. Similarly, your clients may become fatigued along their journey as they encounter a range of changing life events and unexpected detours. Help them remain focused on their plan and remind them you have been helping clients successfully navigate similar journeys for decades.

The space shuttle discovery

Perhaps it’s poetic justice that Jose Hernandez realized his dream when he was selected to fly as a mission specialist on the Space Shuttle “Discovery.” Not only is the shuttle’s name a perfect representation of Jose’s journey to space, but it also fits your mission and the role you serve for your clients.

Much like how the Space Shuttle Discovery was meticulously designed and prepared for its missions, your client’s financial plans are equally well-structured and managed. The discovery phase for your clients involves recognizing their financial aspirations, assessing their current status, and setting achievable goals.

As all astronauts know, they are likely to encounter certain unknowns or unforeseen events on the missions, which they must address and overcome. Your clients must be prepared to adapt to changing circumstances as well. Market dynamics, economic fluctuations, and personal life changes can alter their financial plans. Helping them remain agile and adjust when necessary is simply another way you can help them reach their goals.

Wrap-up

In closing, the incredible story of Jose Hernandez is a testament to the power of inspiration. As a financial professional, you have the unique opportunity to inspire your clients to aim for the stars and achieve their most ambitious dreams. By helping them determine their purpose, recognize their current status, create a roadmap, prepare for financial challenges, and develop an unwavering commitment to their plan, you fulfill a vital role essential to their happiness and success.

Empowering your female clients for retirement success

In March 2023, NASA celebrated Women’s History Month by honoring the accomplishments of 72 women who have ventured into space and the 44 who have contributed to the International Space Station. This recognition reminds us of the incredible strides made by women in space exploration. Similarly, in the realm of financial planning, notable women have broken through barriers and demonstrated their prowess. In this article, we’ll look at women’s shared challenges and achievements and discuss your vital role in helping your female clients not only plan for retirement but also helping them navigate all of the financial nuances.

Female astronauts: Challenges and triumphs

Stereotypes shattered: Historically, space exploration was seen as male-dominated, but women astronauts have shattered these stereotypes with groundbreaking achievements. Pioneers like Valentina Tereshkova, the first woman in space, and Sally Ride, the first American woman in space, demonstrated that women can handle the rigors of space travel. Tereshkova’s mission aboard Vostok 6 in 1963 and Ride’s historic flight on the Space Shuttle Challenger in 1983 inspired generations, showing that dreams have no gender.

Belief in self: The confidence gap has been a persistent challenge for women astronauts. Overcoming self-doubt and imposter syndrome, astronauts like Dr. Mae Jemison became the first African-American woman in space. Her remarkable journey aboard the Space Shuttle Endeavour in 1992 stands as a testament to the power of self-confidence and determination. Similarly, Peggy Whitson holds the record for the longest cumulative time spent in space by an American astronaut. Her unwavering self-belief propelled her through multiple missions, including commanding the International Space Station.

Navigating a male-dominated universe: Space exploration’s male-dominated environment presented obstacles, but female astronauts persevered with remarkable accomplishments. Eileen Collins, the first female Space Shuttle pilot and commander, played a pivotal role in advancing space travel. Her leadership and expertise set the stage for future generations of women in space. Christina Koch and Anne McClain ventured into the challenging environment of spacewalks, contributing to critical repairs and demonstrating that gender is no barrier to exploration.

Balancing career and family: Balancing the demands of space missions with family responsibilities has been a universal challenge for women astronauts. Serena Auñón-Chancellor and Nicole Stott have successfully managed both, proving that personal and professional fulfillment can coexist. Auñón-Chancellor contributed to important research aboard the International Space Station, and Stott’s artistic talents were on display when she painted the first watercolor in space. These women have exemplified that dedication to one’s career and family life can lead to remarkable achievements.

Women investors: Challenges and triumphs

Defying finance stereotypes: The finance industry has long been perceived as a male stronghold, but notable women investors have defied these stereotypes. Abigail Johnson, CEO of Fidelity Investments, and Meryl Witmer, a protégé of Warren Buffett, have risen to the top of the financial world, proving that women possess the acumen and resilience required for success.

Confidence in abilities: Female investors have faced the confidence gap like their astronaut counterparts. Women are often portrayed as risk-averse, but individuals like Sallie Krawcheck, former head of global wealth at Bank of America/Merrill Lynch, have shattered these notions. They inspire by exemplifying the confidence necessary for delivering results in the intricate world of finance.

Breaking gender barriers: The financial sector’s gender disparity is undeniable, yet women investors have broken through these barriers. Women like Mellody Hobson, co-CEO of Ariel Investments, have risen to prominent positions, proving that women’s perspectives are invaluable in investment management

Pioneers in financial frontier: Just as female astronauts have courageously ventured into space, women in finance have pioneered new frontiers. Elaine Bedel has grown her investment advisory practice to $1.8 billion in assets under management, earning her a spot in the top 25 women-owned RIAs in the county.

Financial professionals: Empowering your female clients for retirement success

While women have triumphed in various fields, including finance, as a financial professional, you play a crucial role in helping your female clients nearing retirement overcome unique challenges. Women generally outlive their husbands, often by many years, making it essential for you to empower them to face retirement with confidence. Here are several areas where you can help provide your female clients with the confidence and knowledge needed for their retirement success.

Retirement preparedness: Work closely with your female clients to ensure they have a vision and plan for retirement.  In addition to advising on their savings, investments, and income streams, encourage them to set defined goals about what they intend to enjoy in retirement and where they will spend their time. 

Education and knowledge: Many women may be unfamiliar with financial matters and investment terminology, having delegated those duties to their spouses over much of their lifetimes. Provide education and guidance, explaining investment strategies, retirement accounts, annuities, and long-term retirement planning in an accessible way, empowering them to make informed decisions.

Risk management: Address the confidence gap and potential risk aversion in investing. Help your female clients understand the importance of a diversified portfolio, risk management strategies, and the potential for growth, ensuring they are comfortable with their investment choices.

Estate planning: Assist in estate planning, ensuring that your female clients have a clear and comprehensive plan in place for the distribution of assets, minimizing tax implications, and providing for their heirs and loved ones.

Emotional support: Recognize that the transition to retirement can be emotionally challenging. Offer emotional support, addressing fears and concerns while providing reassurance that you are there to guide them every step of the way.

Conclusion: Celebrating triumphs and empowering futures

In Women’s History Month 2023, NASA’s tribute to women in space highlights the achievements of female astronauts who have shown that the sky is not the limit—it’s just the beginning. Simultaneously, as a financial professional, you have a vital role in supporting and empowering your female clients to secure their financial futures and live confidently in retirement.

The common thread between these extraordinary women is their resilience, determination, and belief in themselves. Whether they’re exploring the cosmos or navigating the complexities of retirement planning, women have demonstrated their ability to excel in any field they choose. Your role in empowering your female clients is instrumental in breaking down barriers and inspiring future generations to reach for the stars and achieve financial success in retirement.

As a financial professional, you likely agree that understanding the intricacies of human behavior is as crucial to helping your clients as comprehending market trends and investment strategies when constructing their portfolios. And perhaps there is no better thesis on how behavior influences financial decision-making than the contemporary classic, “Thinking, Fast and Slow.” Written by Nobel Laureate Daniel Kahneman as a summary of a lifetime of research in the field of behavioral economics, Khaneman offers invaluable insights into the psychological underpinnings of decision-making.

This blog explores why investors often make quick, emotional investment decisions, especially during volatile market conditions. We’ll discuss Kahneman’s theory of dual-process thinking—System 1 and System 2—and uncover how various behavioral biases can influence decisions. Finally, we’ll discuss strategies you can employ to help your clients make sound, informed choices when they are most likely to do otherwise.

How we make decisions

Thinking, fast and slow, introduces us to the concept of two distinct mental processing systems that Kahneman explains have been integral to the survival of the human species since the beginning of time: System 1 and System 2. These systems operate at very different speeds and serve entirely different functions.

System 1

System 1 thinking is fast, automatic, and intuitive. The rapid-fire mode of thinking allows us to make snap judgments and decisions without conscious effort. This system relies on heuristics—mental shortcuts that simplify complex tasks. It’s highly efficient for everyday tasks, such as recognizing a friend’s face or responding to a sudden danger.

It’s been estimated that System 1 thinking represents 98% of our decision-making processes and that, on average, a person will make as many as 35,000 decisions daily. Examples of System 1 thinking include detecting hostility in a voice, answering  2 + 2 = ? reading, or knowing to stop when you see a red traffic light. These actions and thousands of others require very little conscious thinking and happen spontaneously.

Characteristics

• Fast
• Unconscious reasoning
• Judgments based on intuition
• Processes information quickly
• Hypothetical reasoning
• Large capacity
• Prominent in humans and animals
• Unrelated to working memory
• Effortlessly and automatically
• Unintentional thinking
• Influenced by experiences, emotions and memories
• Can be overridden by system 2
• Prominent since human origins
• Includes recognition, perception, orientation, etc.

System 2

System 2 thinking, on the other hand, is deliberate, analytical, and effortful. It’s the mode of thinking we engage when faced with complex problems or when we need to exert self-control. System 2 thinking involves careful consideration, logical reasoning, and a conscious evaluation of information.

Examples of System 2 thinking include completing complex calculations, analyzing a comprehensive financial report focusing on the voice of a particular person in a crowded and noisy room, looking for a woman with white hair, or filling out a tax form. System 2 thinking requires conscious effort.

Characteristics

• Slow
• Conscious reasoning
• Judgements based on examination
• Processes information slowly
• Logical reasoning
• Small capacity
• Prominent only in humans
• Related to working memory
• With effort and control
• Intentional thinking
• Influenced by facts, logic and evidence
• Used when system 1 fails to form a logical/acceptable conclusion
• Developed over time
• Includes rule following, comparisons, weighing of options, etc.

Beware behavioral biases

Understanding the differences between System 1 and System 2 thinking is crucial to unraveling why your clients may be inclined to make poorly informed emotional decisions with their investment portfolios when markets are raging or collapsing. In these conditions, System 1 often takes the lead, and this is where behavioral biases come into play.

Kahneman’s research sheds light on many of the behavioral biases that affect our decision-making, several of which include:

Loss aversion: People tend to feel the pain of losses more intensely than the pleasure of gains. This bias can lead to hasty decisions when clients see their investments in the red.

Example: A client panics and sells their equity holdings during an extended bear market or when the market declines rapidly. Keeping a long-term perspective would have been more beneficial.

Overconfidence bias: Investors often overestimate their ability to predict market movements, leading to investment decisions that expose them to excessive risk.

Example: A client believes they can consistently outperform the market and invests heavily in speculative assets, exposing themselves to significant risk.

Recency bias: This bias causes investors to give more weight to recent market or economic events and assume that current trends will continue indefinitely.

Example: During a bull market, a client may become overly optimistic and over-allocate to stocks, assuming the market will keep rising indefinitely.

Confirmation bias: Investors seek information confirming their beliefs while ignoring contradictory evidence or choosing not to explore alternative perspectives.

Example: A bullish client on a particular market sector only pays attention to news and analysis that supports their viewpoint, ignoring negative indicators.

Anchoring bias: Clients may fixate on a particular price point or reference point when making investment decisions, even when it’s no longer relevant.

Example: A client purchases a stock at $1000 and refuses to sell it for less than $1000, even though the current market price has dropped to $800, and all indicators point to a further decline.

While your clients–actually while ALL of us–will never be able to completely overcome the behavioral biases that are inherently woven into our duel-thinking brains, there are several strategies and approaches Kahnamen suggests can help us mitigate the impact of these biases on making bad decisions:

Awareness and recognition: The first step in overcoming behavioral biases is to be aware of their existence. Help educate your clients to recognize when they might fall victim to biases. Simply acknowledging these biases can help clients pause and reconsider their decisions.

Slow down and engage System 2: Kahneman emphasizes the importance of engaging System 2 thinking when making important decisions. Encourage clients to slow down and process the information available to them. Encourage them to ask questions like, “What evidence supports this decision?” or “Have I considered all available insights?”

Use decision checklists: Kahneman suggests creating decision checklists or guidelines. These checklists can serve as a structured approach to decision-making, helping clients ensure they’ve considered all relevant factors. For instance, when reevaluating portfolio allocations, a checklist might include criteria such as risk tolerance, diversification, and long-term goals.

Seek diverse perspectives: Confirmation bias often leads people to seek information that aligns with their beliefs. Encourage clients to actively seek diverse perspectives and dissenting opinions. This can help counteract the tendency to selectively process information that confirms preconceived notions.

Embrace uncertainty: Many biases stem from a desire to eliminate uncertainty. Kahneman advises clients to become more comfortable with uncertainty and recognize that not all decisions can be made with complete confidence. Encourage clients to accept uncertainty in their investment decisions and focus on managing risk instead of trying to eliminate it entirely.

Consider the outside view: When making predictions or assessments, Kahneman recommends using the “outside view.” Clients should consider similar situations in a broader context instead of relying solely on personal experiences or intuitions. This can lead to more realistic expectations and decisions.

Implement cooling-off periods: Suggest implementing cooling-off periods in situations where impulsive decisions can be harmful. This means delaying a decision for a set period, allowing emotions to subside and System 2 thinking to take over. For example, if a client wants to make a portfolio change during a market downturn, advise them to wait a day or two before taking action.

Feedback and evaluation: Regularly review past decisions and their outcomes. This feedback loop can help clients learn from their mistakes and successes. It’s a way to refine decision-making processes over time and reduce the influence of overconfidence bias.

Incorporating these strategies into decision-making processes can help clients better manage their cognitive biases and make more rational, informed choices in various aspects of life, including decisions related to their investment portfolios. By understanding the workings of System 1 and System 2 thinking and actively addressing biases, your clients can improve their decision-making process relative to the long-term financial plans you have developed together.