Long-term thinking for HNWI: How the adviser can help
Andrew Tully, technical director, Canada Life writes that advisers are crucial in supporting their client’s long-term thinking, enabling high net worth decision makers to focus on long-term objectives and encouraging them to maintain their strategic thinking.
This can be a far cry from the short-termism world that most of us live in day-to-day. Clients, by and large, know that long-term thinking is beneficial for their futures, but cognitive biases like loss aversion and sunk-cost fallacy can make even the most steadfast long-term thinker question their broader goals.
Fast moving external events such as the Covid-19 pandemic and the war in Ukraine have created significant uncertainty, which has rippled across global markets. That uncertainty and volatility is now being felt by all investors as they grapple with cost-of-living challenges and some of the highest inflation seen in decades. These events add further challenges when aiming to maintain a long-term mindset and focus on further away goals. Clients are increasingly looking to their advisers for help on how they are supposed to build and maximise wealth, against goals that are not in the here and now.
We all know that it is crucial to get the relationship between adviser and client right from the outset. It is these strong relationships that set the foundations for having the challenging, varied, deep and lively conversations that enable advisers to truly support clients. Many financial products are inherently complex and involve trade-offs between present and future goals. Having discussions early on with clients about what exactly long-term goals mean for them can remove some of the fear-based decision making that we’re all prone to when markets become volatile. Fear based decision making can take many forms, but there are a few that behavioural scientists say are the most common. The first being the sunken cost fallacy: the tendency to follow an endeavour to the end based on the amount of money or time “sunk” into a plan, goal, project or idea. The second is the present bias: the overvaluing of immediate rewards, while not thinking about how this will impact long-term plans and goals. Two other common biases, hyperbolic discounting - choosing smaller, immediate rewards, rather than larger, later rewards - and loss aversion can also wreak havoc on a client’s long-term savings goals. With the help of an adviser, these biases can be diminished.
Stopping fear-based decision making isn’t the only place where having concrete goals is important for the client, it is also particularly important when we talk about extremely long-term goals, which run a higher risk of being derailed due to the twists and turns of life. Extremely long-term goals require more discussions and consideration between the client and adviser, as well as more self-control from the client. It’s easy for clients to get dispirited when negative feedback - from the market or other factors - are presented, but having a solid foundation built upon trust with your client can mitigate those knee jerk reactions. Moreover, the flexibility of advisers to recognise the needs of a wide range of clients will continue to be important, especially as client's lives shift and the industry needs to embrace working with a wider range of people and situations.
Plans change and being flexible is imperative for a solid client- adviser relationship. And nowhere is that need for flexibility more profound than in long-term thinking. Major life events - moving house, a wedding, a divorce, having a child, or a death in the family - can drastically change a person’s mindset. It is in these moments that the adviser’s job is to make sure the “live for the now” doesn’t take over completely, reassuring the client that they are on the right track. If the pandemic and the current geopolitical situation have taught us anything, it is that a diversified portfolio spreading risk across many industries and asset classes is essential in building long term wealth.
Advisers who partner with clients on long-term thinking will help lead their clients to better wealth outcomes. Through uncertainty, volatility and change, the long-term, goal-oriented client and adviser relationship are in a better position than most to handle the short-term thinking of knee jerk reactions. Of course, this means that as your adviser-client relationship continues to mature, having open, honest and sometimes, rather challenging conversations with your clients will be essential. Long-term thinking - and the goal planning that goes with that - may feel unnatural for clients in the beginning, but with a good adviser by the client's side, long-term thinking can feel natural in no time.