You think you know your clients fairly well: their birthdays, their hobbies and their tolerance for risk. But research suggests that advisors should go beyond the getting-to-know-you basics and determine the type of relationship that best suits each client.

“It’s essential that financial advisors understand their clients better than they have in the past,” says Keith Sjögren, director of strategy consulting at Investor Economics Inc. in Toronto. “People want an advisor who understands their needs and the type of relationship they want to have.”

Investor Economics surveyed hundreds of affluent investors — those with $1 million or more in investible assets — over the course of five years, and found that five distinct investor types emerged:

> Delegators. “These people are reliant on their advisor, usually accepting exactly what they are told and often allowing the advisor to undertake investing on their behalf,” says Sjögren. This category includes about 8% of investors but is declining in size.

> Dependents. About 22% of investors are dependents, characterized by a heavy reliance on the advisor. “Dependents rely on the research their advisor provides, but they are not going to tell him to go and do whatever he wants,” says Sjögren. “However, they know what their limitations are.”

> Partners. Accounting for 34% of investors, partners take a more active role in their financial planning. “It’s a working partnership,” Sjögren says. “Partners are bringing the money and their personal financial needs; the advisor is providing the expertise.”

This type of investor is becoming more common, thanks to the surfeit of financial information now available. “Access to more information allows them to have a more balanced relationship with their advisors,” says Sjögren.

> Validators. Making up about 25% of the investor population, these are the people who might say to their advisor: “I have 1,000 shares of Bell Canada, but I like the outlook for Telus. What do you think?”

Sjögren says: “They do their homework and want their advisors to confirm they are doing the right thing.”

> Soloists. Advisors aren’t likely to encounter this personality type, which accounts for 11% of inves-tors. These are the do-it-yourselfers who use discount brokers. “They are not looking for advice, or even validation,” Sjögren says.

While the research is sound, Sjögren stresses that these five investor types aren’t scientifically determined. But Lisa Kramer, an associate professor of finance at the University of Toronto’s Rotman School of Management, says it’s “absolutely useful” to look at clients as different investor types.

“Behavioural economists have been fascinated with the idea that psychological biases can influence the financial decisions that inves-tors make,” she says.

While there’s currently no standardized measures to gauge inves-tors’ characteristics, she adds, it’s only a matter of time before such a yardstick will exist.

BEHAVIOURAL ECONOMICS

Until then, she suggests boning up on behavioural economics. “To the extent that advisors can educate themselves as to the characteristics of investors in general,” says Kramer, “they can be better aware of what to look out for in their clients.” She recommends reading Beyond Fear and Greed: Understanding behavioral finance and the psychology of investing, by Hersh Shefrin (Oxford University Press, 2000).

But Dr. Richard Peterson, a California physician and behavioural finance specialist, suggests that rather than labelling clients as one of a handful of personality types, advisors can gauge five specific personality traits in each client: conscientiousness, agreeableness, extroversion, openness to new experiences and emotional stability.

These traits can predict how investors will react to market events, says Peterson, author of Inside the Investor’s Brain (Wiley, 2007) and managing partner for Market Psychology, a U.S.-based consultancy that offers workshops on investment psychology and behavioural economics to advisors. For instance, a client who scores low in conscientiousness, he says, will probably be laissez-faire when the market tanks.

Peterson offers a market psychology test for investors, available at www.marketpsych.com. The test is free of charge, but an understanding of investment psychology is necessary to interpret an investor’s score with any depth.

So, there’s no surefire formula for decoding a client’s investor personality. “It’s a lot of listening and asking questions,” says Sjögren. “Many advisors are great talkers but not great listeners.”

Kathryn Del Greco, a senior investment advisor at TD Waterhouse Canada Inc. in Toronto, has an arsenal of questions to help her determine a client’s personality type. “In the initial fact-finding meeting, I ask clients if they’ve experienced a negative rate of return and how that made them feel, and whether they enjoy investing and following the market, which tells me whether this is someone who is going to be engaged in the process,” she says. “Then I listen very closely to how they respond.”

@page_break@Sjögren recommends asking clients about frequency and nature of contact and the type and amount of information they would like to receive. Something as innocuous as a newsletter targeted at a passive investor that is sent to a hands-on client can indicate the advisor does not know the client well.

Aside from in-depth conversation, Sjögren says, annual surveys — kept relatively short and to the point — also help advisors keep a finger on their clients’ pulse. The questions should remain similar from year to year to give a good idea of clients’ shifting behaviour.

“Surveys are valuable in showing clients that you’re interested in them on an emotional level,” agrees Peterson.

Consistent surveying may reveal that most clients change with time. An individual’s wealth level, income level, age and life stage have the greatest influence on their investor type. This correlation is confirmed by Sjögren and also the 2007 TD Waterhouse Female Investor Poll, which found that older, more affluent women have higher engagement and confidence levels. IE