Using Behavioral Investor Types to Build Better Relationships with Your Clients

Pompian, Michael M.
October 2008
Journal of Financial Planning;Oct2008, Vol. 21 Issue 10, p64
Academic Journal
• Since the bursting of the technology stock bubble in 2000, behavioral finance has taken a more prominent role in the financial media and, more importantly, in the minds of financial advisors globally. • This paper is a continuation and refinement of a March 2005 Journal of Financial Planning article, "Incorporating Behavioral Finance into Your Practice." It presents a framework for financial advisors to categorize their clients into four behavioral investor types, or BITs. BITs were designed for advisors to help them more easily apply behavioral finance to the everyday task of advising clients. • The four behavioral investor types are Passive Preservet, Friendly Follower, Independent Individualist, and Active Accumulator • A description of each behavioral investor type is provided with examples of the cognitive and emotional biases associated with each BIT Advice is given on how best to work with each behavioral investor type so that the advisor can build stronger client relationships. • The paper then presents a diagnostic process called Behavioral Alpha™, a top-down methodology of classifying client investors into behavioral investor types based on their behavioral characteristics. • The Behavioral Alpha approach begins by identifying investors as either active or passive. The next step is to administer a risk-tolerance questionnaire. After that, behavioral biases are isolated to determine a client's behavioral investor type.


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