Does your financial adviser empathise?

Even if the initial outcomes on your investments are not as expected, you will continue to follow your financial adviser, if he shows empathy.

I recently had to consult a doctor, during which I failed to draw any empathy from him . Now, you may wonder if empathy is important at all in this context. After all, you are expected to follow your doctor’s advice and take the prescribed drugs. 

It turns out that empathy could be important not only for doctors, but also for a financial adviser, and anyone else from whom you may seek highest level of professional advice. 

Let me first clarify that I am referring to cognitive empathy and not affective empathy. 

The former refers to my adviser understanding how I feel while the latter refers to my adviser feeling the same way as I do. You should expect your financial advisers to have cognitive empathy, to understand your anxiety about a financial decision and allay such negative emotion.

 

Professional advice

Empathy is an essential part of professional advice, especially when two factors are present — delayed feedback and uncertain outcome. Take investments. Your financial adviser may recommend an equity mutual fund to achieve your professional advice. The suggested outcome is uncertain in that the fund can generate negative returns. Or the fund can generate positive returns and yet fall short of your desired objective. The feedback on your financial adviser's decision is not immediate. At best, your adviser may rebalance your portfolio annually to align with your objective. It is no different with health care. 

Your doctor may treat you for, say, persistent headache with certain prescription drugs, which may cause unintentional side-effects. Now, the doctor is not always sure about the side-effects or for that matter, the reasons for the side-effects. 

What does this all mean? When you have delayed feedback and uncertain outcomes, luck plays an important role in the process. In such cases, empathy becomes very important. Suppose the investment does not generate the required returns. Or suppose you do not respond as expected to your doctor’s treatment. You may be tempted to abandon the advice and, perhaps, make yourself worse-off. But if the doctor or the financial adviser shows empathy, you are bound to listen to her and importantly, not act in haste if the outcome is not as expected. 

This is because empathy has a positive neurophysiological response. Your brain releases oxytocin, a hormone that plays an active part in your social behaviour. Now, you are likely to release oxytocin when your adviser shows empathy towards you. And that could lead you to trust your adviser. 

The upside’s that you are more likely to follow your doctor’s advice or your financial adviser’s recommendations even if the initial outcomes are not as expected. 

(The author is the founder of Navera Consulting. Feedback may be sent to knowledge@thehindu.co.in)

(This article was published on September 14, 2013)