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Clients Are Hardwired to Sabotage Their Retirement. Use This Research to Save Them.

Personality tests can help predict portfolio withdrawal rates.

Personality tests help human resources professionals gain insight into whether a prospective hire will fit in on a team and how that person’s strengths might best be harnessed.

A study published last month in the journal Psychology and Aging suggests that personality tests might also be useful to advisors looking to gauge their clients’ funding needs in retirement. But would most advisors be willing to slide one in front of a new client at a consultation?

The study provides an argument for doing so. Analyzing data from the University of Michigan’s longitudinal Health and Retirement Study, Sarah Asebedo and Christopher Browning of Texas Tech University demonstrated for the first time that specific psychological characteristics are predictive of portfolio withdrawal rates. 

For example, conscientiousness, or the tendency to take obligations seriously, is linked with lower withdrawal rates, given that conscientious people generally err on the side of caution. High levels of agreeableness, or a tendency to be helpful and generous, are associated with higher rates of withdrawal, perhaps because agreeable people have a harder time of turning down appeals from charities, family, and friends.

“I think it is smart to not only gather information about a client’s financial situation, but to also gather data about who they are as a person,” said Asebedo. While this can be done through conversation, Asebedo said, key factors like personality type, emotions, and stress levels can best be measured with assessment tools based on questionnaires. 

To be sure, psychology suggests there are limits to how well most people understand their own motivations and behavior patterns, never mind what they’ll willingly reveal to others. By asking clients to answer questions not directly or obviously related to their spending patterns, personality tests may help advisors circumvent self-serving biases. It’s potentially an elegant solution, but presents its own set of concerns. 

For one, the tests can be seen as prying. Googling “personality test privacy” makes this clear. Second, some advisors feel more comfortable sticking with qualitative approaches. Steve McCarthy, owner and principal of McCarthy Asset Management in Redwood Shores, California, can’t see himself using them to assess new or existing clients. “It’s just how I’m wired,” he said. “We monitor how much clients are taking out of their portfolios, and if it’s too high, we let them know.”

Advisors may also worry that quantitative evaluations are alienating to clients. “You can’t take away the human connection,” said Steve Jurich, owner and principal of IQ Wealth in Scottsdale, Arizona and the host of Mastering Money, a daily radio show in Phoenix. “That’s the problem with robo-advisors: ‘Take this quiz; now we know you.’ No, you don’t.”

Jurich said he routinely administers quizzes that ask clients to confront hypothetical financial scenarios, and would be open to administering a generic personality test if he found the right one: “We all love taking quizzes. Financial planning for some people is like taking cod liver oil, so the more fun you can make it, the better.” 

Still, an advisor must deploy them with care. “People are smart,” Jurich said. “They get bored: ‘You’re just giving me a quiz.’ It has to be used, I believe, artfully, and the person has to be on board.”

Asebedo makes a similar case. “This line of data gathering would only jeopardize the [client-advisor] interaction or relationship if the financial planner has not established a strong foundation of rapport and trust,” she said.

She pointed out that the tests are not a crystal ball, but the concept of a highly predictive assessment tool led McCarthy to muse about how it might affect his client selection process. “I think I’d be less inclined to take on a client who’d perhaps be more likely to outlive their money,” he said. “It’s depressing to have a client like that.”

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