Shift Your Focus to Gain AUM

October 21, 2014

by Dan Solin

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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.

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