What is the Key to Effectively Managing Personal Finances?

The key to effectively managing your personal finances is to have a positive attitude. The foundation of having a positive attitude is having clarity of your financial goals and who you are, in particular the level of risk that you can take, and having the right advice from a professional advisor.

It is all about having the right balance of these elements. How one perceives money will be a big driver of their attitude. Therefore, having clarity about your perceptions of money is critical to living a happy life.

On May 27, 2013 a great article was written by Ranjeet Mudholkar, CFPVice Chairman & CEO at (Financial Planning Standards Board India) FPSB India Mumbai on this topic.

You can read it in full at: http://www.firstpost.com/investing/how-positive-attitude-will-help-you-manage-personal-finances-effectively-818053.html

In particular, the article highlights some interesting research conducted in post 2007-09 Financial Crisis by MFS Investment Management, a US-based global asset manager, which throws light on the effect the market movement has on peoples attitude. The survey found that 43 percent of respondents said their risk tolerance had decreased while 14 percent said it had increased. Before the economic downturn, 14 percent of the investors said their primary goal was protecting principal and not losing money. Now, the figure is 36 percent.

Investors are exhibiting this behavior at a time when investing in equities could be to their potential long-term advantage, the report states. Before the downturn, 50 percent of investors were generally willing to take substantial risk for substantial returns; today, its 23 percent.

Whats surprising, the survey notes, is that while investors have become more protective of their assets, only 37 percent have rebalanced their portfolio; 44 percent of investors using an advisor have rebalanced, the survey found. Further confounding results, MFS says, show that 68 percent of investors claim to be making decisions on their own with minimal input from an advisor. However, more than 60 percent of respondents are less than very confident that their assets are appropriately allocated. The economic crisis has only lead 30 percent of respondents to seek professional financial advice.

Clearly, the loss aversion behavioral bias is being exhibited where people are far more concerned about what they may lose than what they can gain. Therefore, they are not making healthy financial choices which is detrimental to the overall quality of their life.

To learn more about effectively managing personal finances, please visit the Financial DNA website.


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Are You Skating on Thin Ice?

I skate to where the hockey puck is going to be, not to where it has been. – Wayne Gretzky

You dont have to be a hockey fan to realize the brilliance of this quote and how this strategy enabled Wayne Gretzky to be recognized as the undisputed all-time greatest hockey player.

Where is the puck going in the financial services world?

Here are three trends worth considering:

1. Behavioral Finance: Translating Theory Into Practice

Independent research shows that 93.6% of the financial planning process is the behavioral management of clients. Yet our research shows 53% of advisors invest 1 to 2 hours of time in the discovery process, and 50% of advisors spend under 6 hours in the complete financial planning process.In addition, behavioral finance has been given a significantly increased level of importance with the UK regulator publicly expressing its views. As other regulatory authorities strengthen their suitability compliance requirements, will they go down a similar path? And what does this mean for advisory firms?

Perhaps it is time for firms to start preparing now for a regulatory environment that is requiring greater recognition of a clients behavioral biases in making suitable recommendations.

Do you have a system in place to holistically determine the complete financial personality style of the client? Or, are you still relying primarily on your intuition?

2. Target Marketing: Moving Beyond Demographics to Behavior

For decades, financial service marketers have used demographic segmentation for product development, product positioning, marketing communication and results measurement. Traditionally, this segmentation has been done based on characteristics such as age, income, gender, family life stage, occupation, education, race, etc.Terms such as Baby Boomers, Gen-X, and Millennials were created with generalizations on how to market to these groups. In addition, when we overlay men versus women, the marketing mayhem begins!

Despite continuing popularity, the research (Journal of Financial Services Marketing, Suboptimal Segmentation: Assessing The Use of Demographics In Financial Services Advertising) found that while demographics can explain broad behaviors, they play a weak role in explaining brand preference, product purchasing, innovation adoption, channel use and technology uptake.

Behavioral marketing is gaining followers within the marketing community while the dimensions of how to segment based on behavior differs by firm. While some organizations will segment based on internal purchase (I have business checking so maybe I need a business credit card), payments, and/or use dynamics (how many times I use an ATM), others are expanding the realm of behavior captured to include personality and social behavior.

Forward thinking firms now want behavioral data that empowers sales and service people at the point of sale.? For example, how do you present new ideas, how will a prospect absorb technical concepts, and what is the prospects preferred style of interaction are all data points that would assist to uniquely engage a prospect.

With increased competition and ever-tightening margins, firms that are not able to successfully pinpoint potential customers, cross-sell indicators and income opportunities will be at a significant disadvantage to those more progressive organizations.

Are you still stuck in the demographic marketing world or do you have the tools that can capture the communication preferences and personalities of your prospects and clients?

Creating Unique Client Experiences: Going Beyond the Talk

How do you really define creating a unique customer experience?To answer that question, you need to go back to marketing basics and take the customers perspective. From the customers point of view an excellent customer experience is one that is simply effortless and easy. No customer wants to be required to go to any extra trouble, or to fix problems, or to repeat things already communicated. The best kind of experience a customer can have is one in which he can meet his need or solve his problem completely, without having to jump through hoops or overcome obstacles. Obstacles are friction. No one has time for obstacles.

But if you dont objectively uncover the financial personality of your clients, how will you know what is an obstacle for them?? Are some financially disorganized making your attempts for them to submit budgets a frustrating experience?? Or, maybe they want options and as soon as you recommend certain investments, the lines of communication begin to shut down.

Do you have a tool that can tell you how to present products and solutions according to the communication preferences of your clients?

As you think about these trends and the actions you are taking now, are you skating to where the puck is going or are you skating on thin ice?

Now its your turn.? What are your thoughts on these trends in the financial services industry?

To learn more about gathering objective behavioral data on your prospects and clients, visit www.financialdna.com or www.communicationdna.com.

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CRM: Customer Relationship Management or Compliance Regulatory Machine?

How financial services regulatory pressure can shift the intended use of a technology and a definition of a word.


CRM has traditionally stood for Customer Relationship Management system but with new FINRA regulatory requirements and mounds of risks to manage, we are starting to see a shift, particularly with Broker Dealers and CRM is starting to have a much different meaning- Compliance Regulatory Machine.

New FINRA Rule 2111 requires Broker Dealers to take a closer look at the investment advice that advisors are providing their clients. These rules coupled with potential holes in the documentation processes between advisors and Broker Dealers present a huge opportunity for CRMs and Business Apps to close this gap.

FINRA Rule 2111 requires, in part, that a broker-dealer or associated person have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customers investment profile. In general, a customers investment profile would include the customers age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs and risk tolerance.

Broker Dealers are now required to do their due diligence in regards to the investment suitability that their advisors are recommending for the investor clients. This suitability is determined based on a series of 9 parameters that FINRA has recommended as important such as client age, financial circumstances and risk tolerance. This entirely new regulation is a very daunting task for Broker Dealers when you figure the amount of data that is required to determine this suitability and the means that Broker Dealers currently have to collect it.

There are an estimated 150 million+ individual investors in the United States, 9 parameters that FINRA recommends the Broker Dealers should consider and that the majority of advisors are housing their data and technology independent from their Broker Dealer. This shift will require CRMs to adopt slick, interconnected technology platforms for managing compliance which include business apps for vendors across the board.

We believe it is a step in the right direction that one of the 9 parameters the FINRA Rule 2111 recommends for reviewing product suitability is risk tolerance. This means risk tolerance will have to be quantifiably measured and documented in the financial planning process. Therefore, the traditional approach of? advisors asking the question to the client: What is your tolerance to risk? will not suffice for this measurement. Not only is this method not properly capable of documentation but it also is now proven that this type of question is heavily biased based on the advisors intuition and cannot be properly measured. The days for advisors of making intuitive assessments of a clients risk tolerance based on their perception of the clients factual position and representations made during discussions are over. There is no room for advisor or client blind spots getting in the way.

What this means is that advisors will be obligated to start deploying validated systems that objectively measure risk tolerance on a highly reliable basis. Then the advisor will need to have systems for linking the risk tolerance to the suitability of investments. Further, they will need to have processes for monitoring that suitability on a long term basis and documenting it for compliance.

The FINRA Rule 2111 does not define risk tolerance. This will bring us to the next issue as to what is it and how is it measured. Whilst some people think that the term risk tolerance is clear because it is commonly used the fact is it is not. Does it mean a persons propensity to take risk or capability to emotionally accept losses? These are different behaviors. Then comes the broader issue that knowing the risk tolerance of the client is of itself not enough to make suitable investment recommendations. This is because risk tolerance does not cover the broader behavioral biases of the client and advisor which will impact the suitability of recommendations. For instance, the Newness Bias, Benchmarking Bias, Pattern Bias, Optimism Bias etc. So, advisors thinking they can hide behind any risk tolerance tool with a tick in the box may be fooling themselves. The UK regulator (Financial Conduct Authority) is taking this broader approach.

The implication of the need to take account of these broader behavioral biases up-front when initially making recommendations and then monitoring them is huge for the Compliance Regulatory Machine. We are certain that this means the future of behavioral systems which reliably predict all of the behavioral biases of the clients and advisors (to mitigate the impact of advisor blind spots) is very bright and almost guarantees a place in this compliance regulation.

In the 21st Century we all use apps to get things done and even if it takes 5-10-15 more years, the same will go for Broker Dealers with their compliance regulations. This is where we see the future for compliance regulation and how behavioral discovery systems? will fit in. With the modern enterprise CRMs, Broker Dealers will have a greater opportunity to more robustly monitor the activity of the advisors without getting in their way. All advisors will be on the same platform that are interconnected and operate in real time.

Lets take a quick look at how our DNA Behavior discovery systems will soon take a leap forward in this next gen revolution. We have built Financial DNA apps for the Salesforce and Redtail CRMs- two of the most widely used CRMs for financial services, with others proposed in the near future. By utilizing a web like architecture that these CRMs provide, the Financial DNA app will be able to speak to other financial planning apps maintained by the advisor.

This is how heavy compliance regulations can be displayed visually for the advisor to follow and understand.

Portfolio Compliance, Risk Tolerance, Risk Measurement

The above figure depicts a scenario recognized as Not Compliant with our mock compliance CRM app. This app puts Risk Tolerance, Calculated Financial Circumstances and Portfolio information in one screen- thats easy to use.

In the above example an advisor is using 3 apps inside their CRM to monitor compliance: Financial DNA, Morningstar and a custom compliance app the advisors Broker Dealer has built to measure the clients financial circumstances. The independently validated Financial DNA app states the behavioral level of risk that the client is naturally comfortable taking is Below Average, The Broker Dealer compliance app says that the client can afford to take Average risk and Morningstar has rated the current portfolio risk level at Above Average. We see this scenario time and time again when working with advisors. Other methods of measuring risk tolerance are often flawed, or non-existent, and not capable of proper documentation- because of this, the clients are invested in too much risk for their preference level. When investments start to decline, the clients become uncomfortable and stressed and leave the advisors watch. Now, with this new FINRA regulation, not using a validated instrument for measuring investment risk tolerance, and possibly other behavioral biases? is not just a matter of lost client engagement for the advisor (and hence revenue), but also a substantial legal liability for Broker Dealers and advisors.behavioral finance, risk tolernace, finra regulatory requirements

For additional information, visit the Financial DNA website or contact inquries@dnabehavior.com.


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The Life Experience I want to Create

But my Financial Advisor doesnt ask the right questions!

Does your Financial Advisor asking the right questions?Sadly, generally speaking, not all financial advisors are fully committed to exploring your hopes and dreams and then matching your financial plans to deliver those expected life experiences. Its not their fault, they are often young and inexperienced in the ways of life or have not embraced their own life journey yet, and they are obligated to sell you products determined by the company they are employed by.

As a client what can you do to change the way your financial advisor works with you in order to meet your unique needs? What can you do as a client to move the relationship to a level that puts you in the driving seat and educates/helps your advisor to spend more time investing into you, your financial behavior, your plans and your dreams?

At the outset its important to understand that your financial advisor may be completely resistant to the thought of understanding your behavioral approach to your finances (other than your ability to manage risk). But equally important is to know that the financial industry is changing ? more and more attention is being paid to how to increase business and retain clients through changing the behavior of the industries advisors.

So here are some keys to changing the client/advisor relationship:

  1. Research what the financial advisory company is saying about itself. Look at websites, marketing material; listen to executives recorded messages: look for the types of phrases listed below and ask the question ? what will you do to deliver this statement in terms of the financial advice you propose to give to me?
    - tailored client advisory service
    -the best possible expert advice for your situation
    -exceed their clients’ expectations (do they know/understand your expectations?)
    -advisers will help identify exactly what you require to meet your needs and achieve your goals (how?)Are you achieving your financial goals for living a Quality Life?
  2. Understand your own risk attitudes. Be clear about what you really think risk means to you. This self-awareness will help you to navigate the risk conversations more effectively and will ultimately deliver a greater level of success in the relationship.
  3. Encourage the advisor to ask leading questions. Prompt them. For example:
    -Would you like to know about a significant financial experience in my life? (this might refer to a financial loss, a financial gain or seeing something similar happen to a family member)
    -Would you like to know about three noteworthy plans I have that have not as yet come to fruition.
    -Can I tell you about proposals my children have for paying for their education?

There is, of course, no guarantee that your advisor will adjust their performance to embrace a more behaviorally based advisory relationship with you, but at this juncture the next question that you should be asking is this: – do I really want to continue to give my business to a financial advisory company who cares more about product sales than the plans I have that I trust will prosper me and give me and my family not only a good life but help us to deliver the hopes and dreams we have?

To learn more about developing financial behavior awareness, please visit the Financial DNA website.


Try Financial DNA free for 30 days!

White Paper: Blind Spots in the Financial Advice Process

Every financial advisory firm has a client planning process which it considers to be sound. However, it is likely that the process will have one or more key areas that are missing or are not being adequately executed with the appropriate systems.

In raising these blind spots we fully recognize that there is an inherent tension between enhancing client engagement, which boosts revenues, and compliance, which protects the business. Our recently released Blind Spots in the Financial Advice Process white paper serves to highlight these blind spots that your firm should be aware of, and then recommended actions to consider.behavioral finance, financial planning, blind spots, home office goals, client behavior, financial personality

Where are the blind-spots in your firms current advisory process causing this gap?

Read the Executive Summary to the White Paper

Download the Blind Spots in the Financial Advice Process White Paper