Helping Fearful Investors

Addressing Investor Fears

There are lots of things to be afraid of in the world we live in, so don’t add yourself to that list. Meaning, most humans have an instinctive aversion to danger, with one of the most feared dangers being that of the unknown. We are built this way because danger can harm us (physically, mentally/emotionally, and financially). The human brain and adrenal system work to combat eminent danger with age-old reactions like fight, flight or freeze, among others.

Look at your own financial practice and understand that an unknown fear can trigger one of the above reactions in a prospective investor. I’m sure you can think of a situation where you had an unexpected reaction from a prospect or client that resulted in a negative outcome for your business. Your ego may write off these scenarios to protect you emotionally having you thinking it was “their problem, not your problem”, but your ego protecting your self-image doesn't protect your business plan. Though you may never know the true cause of an investor’s fears, think about how you can look inward to make your firm less stressful for an investor, allowing them to be more open with their thoughts and feelings.

Here are three easy things you can do to help investors overcome their fears and give you a less stressful business:

1. Be proactive, not reactive. Ask your investors what they are afraid of while using empathy (which equates to listening carefully to the investor without a product in your mind). Understanding their fears gives you a guide to their possible reactions and behaviors in certain situations which helps you to deepen the relationship.

Examples of understanding their fear and using it as a guide:

1. If your client demonstrates fear of a "lack of control", it’s your job to help them to understand that the financial plan you are building together will allow them to gain more control, not less. Using respectful language and explaining the plan in a way that is not overwhelming may dampen their fears of “losing control".

1. Past negative life experiences can exacerbate fears, so if an investor tells you they’ve had assets illiquid at some point, you probably won’t want to suggest a product that “locks” up their money and triggers that fear for them.

2. Realize that unpredictable and volatile environments can escalate fears of the unknown. If times are stressful, don’t make yourself one of the “unknowns” that investors fear.

Make yourself more approachable by:

1. smiling and using non-threatening eye contact,
2. using body language that is not intimidating,
3. listening carefully and sharing your own stories when appropriate,
4. being available and accessible,
5. using language that accommodates them, not confusing jargon.

3. Understand that investors can catastrophize the outcomes of their own decisions and their relation to unknown events. You can help to stop the investor’s anxiety by addressing it right away. Using a tool that can show an investor a worst-case scenario and how their investment decisions may or may not be impacted is key. Implementing a software such as RiskPro, allows you to demonstrate to an investor a forward-looking timeline using volatility data of their current and proposed investments. Allowing the investor to clearly see and understand their possible investment outcomes empowers them to make decisions that fit their lifestyle and aspirations while reducing anxieties caused by fear of the unknown.

You're aware that a fearful investor will most likely sabotage themselves and the plan you've made for their success at some point, so be mindful and respectful of their fears, even if you feel they are unfounded. This mindfulness will strengthen the relationship, keep them on track, and allow you to build a less stressful and more successful practice.

Disclosure: The information provided herein is the opinion of The Pacific Financial Group (“TPFG”), a registered investment adviser, and may change without notice at the discretion of TPFG. TPFG makes no warranties as to the accuracy of the information or any representations made or implied at any time given. The information should not be construed or interpreted as an offer or solicitation to purchase or sell a financial instrument or service. The information is for informational purposes only and should not be relied on or deemed the provision of tax, legal, accounting, or investment advice. Past performance is not a guarantee of future results. All investments contain risks to include the total loss of invested principal. Diversification does not protect against the risk of loss.

RiskPro® is an investment risk profiling and portfolio construction software as a service platform developed by ProTools, LLC (“ProTools”). ProTools is a technology company headquartered in Newport Beach, CA. RiskPro is a risk analysis tool that provides information only and not intended to provide investment advice. For more information, visit www.riskproadvisor.com