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Based on merit alone, I would entrust my own portfolio to almost every registered investment advisor (RIA) that I have met. But merit is not the governing factor in most decisions.
This disconnect – between my rational brain telling me an advisor is extremely competent and my emotional brain counseling me against retaining him or her – is the crux of why you need to shift your focus if you want to gain more assets under management (AUM).
I know hundreds of RIAs. Collectively, you are a very impressive, caring and competent group. You take your work seriously. You act in the best interest of your clients, without conflicts of interest. You are genuinely concerned about their financial well-being.
You are also extremely knowledgeable. Many of you have obtained credentials that require hundreds of hours of study. You attend conferences to be sure you are current with the latest developments in the world of finance.
You enjoy, and often participate in, the debate about investment strategies, such as active versus passive, smart beta, profitability, momentum, withdrawal rates and asset allocation.
If the process of acquiring and retaining clients were governed by merit alone, few RIAs would have a problem.
But that’s not how decision-making works. You need to understand the emotional rules behind how clients choose advisors and entrust individuals with their money.
Brain damage and decision-making
Dale Carnegie accurately noted, "When dealing with people, remember you are not dealing with creatures of logic, but with creatures of emotion."
Few RIAs understand the powerful role of emotions in making decisions. If you harbored any doubts, this fact should persuade you: When an individual suffers traumatic injury to certain parts of the brain that govern emotional responses, that person’s ability to make rational decisions is compromised.
Financial decisions can be dramatically affected by injury to the portion of the brain known as the VMF cortex. When this area of the brain is compromised, patients make short-term decisions to obtain instant gratification and disregard long-term negative consequences.
Think about the implications of this research. Losing the ability to experience emotions, even though processing rational information is not impaired, impacts the ability to make decisions. One prominent neuroscientist observed that the brain stores emotional memories of past decisions, and those memories govern decision-making. When the brain can't make those associations, decision-making is compromised.
This research lends credence to the observation that your prospects are likely deciding whether or not to retain you based on factors other than merit. A significant part of their decisions are emotional. Don’t believe me? A review of the studies supporting this conclusion can be found here.
The importance of emotional intelligence
The term "emotional intelligence" has been defined as "the subset of social intelligence that involves the ability to monitor one's own and others' feelings and emotions, to discriminate among them, and to use this information to guide one's thinking and actions."
People with high levels of emotional intelligence are acutely self-aware. In order to empathize with others, you need to understand your own emotions.
The single most important trait of a successful advisor is the ability to empathize with the feelings of prospects and clients. Unless you can put yourself in the shoes of your prospect, you are unlikely to connect with that portion of the prospect’s brain that makes emotional decisions.
An RIA with low emotional intelligence is unlikely to maximize his or her potential for success, professionally or personally. A number of studies (summarized here) find that emotional intelligence is a more significant predictor of success than IQ. People who are better able to handle frustration, control their emotions and get along with others achieve more positive professional and career-related outcomes than those with high intelligence.
Another long-term study found emotional intelligence was four times more important than IQ as a factor in personality- and career-related success.
Those with high emotional intelligence are people you want in your life. They understand your emotions and help you achieve your goals.
Isn't that the advisor you want to be?
Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth advisor with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is The Smartest Sales Book You'll Ever Read. He limits his sales coaching practice to advisory firms that advocate evidence-based investing.
Read more articles by Daniel Solin
