Merrill Lynch adviser Stephen Stabile was intrigued.

A client filling out an investment personality assessment had checked a box on the form stating, “I feel that I may have the need for a large amount of cash in the future.”

The client’s assets and portfolio far outpaced previously set plans, so this seemed puzzling. Using the assessment response as a jumping-off point to ask questions, Stabile found out what was behind the abrupt change.

“Steve, I may or may not have a touch of cancer,” the client told him.

While the client tried to downplay the diagnosis, he did have cancer and would have health care costs to address. The assessment helped Stabile uncover information about his client’s life and needs the adviser might not have known otherwise.

Stephen Stabile of Merrill Lynch and a growing number of advisers rely on assessments and other behavioral finance-based tools to figure out clients’ underlying mindsets about their wealth. (Image: Jordan Hollender)

Stabile and a growing number of advisers rely on such assessments, and other behavioral finance-based tools, to figure out clients’ underlying mindsets about their wealth. By utilizing the tools, Stabile, co-founder of the Hirsch Stabile Group in New York, says he is able to understand his clients deeply from the outset of their relationship.

“I can become more effective that way,” he says.

Although many advisers historically have relied upon risk assessment and psychological profiles to better tailor asset portfolios and financial plans for clients, recently developed tools further fine tune and broaden those evaluations. The new tools allow advisers to investigate not only clients’ risk appetites but also evaluate what besides more money will satisfy their needs and wants.

Advisers may use the answers supplied with those more sophisticated tools, then also draw on conclusions from recent studies on money and happiness, and ultimately, may consider their clients’ wealth in a way that goes beyond simply trying to generate higher returns.

Betsey Stevenson, an associate professor of economics at the Gerald R. Ford School of Public Policy at the University of Michigan, has looked into the relationship between money and happiness.

“A 10% rise in income is associated with a similar change in happiness at any income level,” she says. “But when your income is $20,000, that 10% is a lot less money than when your income is $200,000. As your income goes up, the extra happiness or life satisfaction you get per dollar shrinks, because it is a smaller proportion of your income.”

In the May issue of the journal Psychological Science, three University of Cambridge professors published their findings after reviewing more than 76,000 bank transaction records. Rather than focusing on income levels, the researchers found that, in order to obtain happiness from additional wealth, people have to spend more on products and services that are a match for their personality.

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“This effect of psychological fit on happiness was stronger than the effect of individuals’ total income or the effect of their total spending,” they wrote.

WHAT CLIENTS CARE ABOUT
Advisers “should be trying to help clients discover what [they] truly care about, rather than making investments chasing market performance,” says Svetlana Gherzi, a behavioral finance specialist at UBS in New York.

Gherzi helped the firm create a master list of life goals for advisers to ask clients to rank and identify, encompassing such topics as family, health, self-improvement, lifestyle, philanthropy and control.

She has encountered some skepticism among UBS advisers about the usefulness of behavioral economics. “It’s much easier to stay with the status quo,” she says. “Inertia keeps us in our comfort zone.”

But UBS is also home to advisers who are strong adherents of the new theories and the tools based on them — among them, Andrew Shantz and Tom Mantione of the Shantz Mantione Group in Stamford, Conn.

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"Understanding behavioral economic theories and their impact on investor psychology can be another tool for advisers to use,” says Andrew Shantz of UBS.

“I would say that we have been early adopters,” Shantz notes. “Understanding behavioral economic theories and their impact on investor psychology can be another tool for advisers to use, helping clients enjoy their wealth.”

Employing the behavioral finance-based tools that UBS has developed, including the master list of goals, Mantione says his team learned that a client who was “an inheritor of some significant music rights” also had a passion “to use the stream of income to help support and encourage the arts and art education.”

By helping the client act on that passion and establish the philanthropic outflow, Mantione strengthened his relationship with the client.

INCORPORATING LEGACY ASSETS
“To many people, this might not seem like the purview of a private wealth adviser,” Mantione says. “However, it is critically important to the development of a plan that incorporates not only liquidity and lifestyle assets, but legacy assets, as well.”

At Merrill Lynch, Stabile, when he’s not advising clients, also beats the drum firmwide about the advantages of using behavioral finance-based tools. For the past 18 months, he has traveled every few weeks from his New York office to the wirehouse’s branch offices nationwide.
He then shares with fellow advisers his views about the effectiveness of using behavioral finance-based strategies to help his clients.

Stabile has learned to expect a mixed response. “Whenever I give presentations, about 75% of the audience is extremely receptive, but the other 25% look at me like I have three heads,” he says.

Stabile understands why advisers believe they should simply help clients generate more wealth, and not ask what could be seen as nosy questions. But the idea of going beyond returns is catching on.

At United Capital, a Newport Beach, Calif.-based firm with $16 billion in AUM, managers want advisers to focus from the outset on clients’ happiness and not only on their wealth gains, says CMO Gail Graham.

“We don’t say, ‘You can’t be happy if you don’t have $10 million.’ We want people to live richly, not necessarily be rich,” Graham says.

United Capital’s website asks prospective clients to take a quiz to determine their “money mind.” The quiz asks sensitive questions with multiple-choice answers meant to plumb the depths of the prospects’ personal values.

Among the questions: What would you do with three days of free time? What would you choose as one of the possible last acts of your life, if you were on a plane about to crash? If you received a message to return a call from your doctor, would your immediate emotion be fearful?

Read more: Is behavioral finance the edge advisers need to beat robos?

THE MONEY MIND
At the conclusion of the quiz, the prospective clients receive definitions of their money minds — that is, where they stand psychologically in relation to their wealth.

For example, what if a prospective client who chooses to spend free time with her family and friends also answers, hypothetically, that she would contact loved ones in the moments before a plane crash? And what if she says that she would also remain calm when confronted with a call-back message from her doctor?

The quiz would conclude that this prospective client has a “money mind that worries too much about others at the risk of letting their own finances falter.”

“The money mind tool helps people discover their biases,” Graham says.

Emily Sanders, an adviser and managing director at a United Capital branch in Atlanta, also uses the quiz with clients.
During her 22 years of practicing, and long before behavioral economic terms became the buzzwords they are today, she has helped clients based on related theories, Sanders says.

“It was always intrinsic to me to look at the behavioral aspects,” says Sanders, who is the daughter of a psychiatrist. “I was tuned in to motivations.”

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“We don’t say, ‘You can’t be happy if you don’t have $10 million.’ We want people to live richly, not necessarily be rich,” says Gail Graham of United Capital.

THE BIG PICTURE
United Capital’s tools “cut across all income levels when they are administered properly and with sensitivity,” Sanders says. “People who visit us get to spend time on what really matters to them. They look at the big picture, not just on getting returns.”

Sanders recalls one client who was under tremendous stress. The client had been unexpectedly widowed, so Sanders used what United Capital calls behavioral finance-based “honest conversations” cards to help the client determine her lifetime priorities and their effect on her money decisions.

The client wanted money to pay off her mortgage, take yearly vacations with her kids and pay for college tuition — but to stay away from touching the family’s principal. She could accomplish that with 6% or 7% returns on her portfolio.

Understanding this helped the client, who had never managed the family’s money before her spouse’s death, “feel more in control of her situation,” Sanders says. “The entire process put her at ease at a difficult time in her life.”

And this approach doesn’t help only clients at the firm. Jason Gordo, managing director for United Capital’s office in Modesto, Calif., notes that after 18 months of using data-driven, behavioral finance strategies, his practice increased its revenue by 42%. At Wells Fargo Advisers, management has also created behavioral finance-based tools.

Sandra McPeak, a Wells Fargo managing director based in Rolling Hills Estates, Calif., welcomed the introduction of the tools.

One of the tools, a planning software called Envision, incorporates an exploration and tracking of clients’ life goals, at the same time as it is helping to plan their investments.

ENVISIONING DESIRES
One of Envision’s chief functions is helping clients to match their spending with their life goals.

McPeak recalls one couple who used the Envision tool to explore those goals. The couple determined that their desire to retire earlier was more important to them than maintaining their pattern of extreme monetary generosity toward family members.

“Grandma and Grandpa always treated,” McPeak recalls. “Once they understood the impact on their retirement, they switched to occasional restaurant dinners and more family dinners at home. This and other changes due to increased awareness led to permanent changes in spending habits.

“Now, well into their retirement, they feel secure knowing that they accounted for expected and unexpected spending for all their anticipated years of retirement. They feel in control,” McPeak reports.

Merrill Lynch’s Stabile recalls using the tools to help one client couple — a CEO and his wife — make a huge life change. Because of job stress, the husband “was melting down, never getting to spend time with his family,” Stabile recalls.

Because Stabile had already used the tools to help the couple figure out their life goals, the wife was comfortable enough to seek his help for her husband. “She knew he would listen to me,” Stabile says.

Ultimately, after discussing his situation with Stabile, the CEO switched companies.

Stabile says his relationships with clients such as these have become so strong that he no longer has to prospect for new business. Instead, his existing clients send their friends, family and associates his way. “It’s really simple: deepen the relationship and exponentially grow your practice,” he says.

Miriam Rozen

Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.