What causes clients to make irrational decisions? The short answer: our amygdala. This almond-shaped tissue in the middle of our head controls our emotions, and at the end of the brain stem, the “reptilian” or “primal” brain controls our behaviors. Evolution created the amygdala’s instinctual survival flight response to prevent us from getting eaten by saber-toothed tigers or jumping off cliffs trying to fly like a bird.
Unfortunately, this same strong primal and instinctual emotion keeps us from making rational decisions when it comes to dealing with our money. We feel before we think. Behavioral financial advice helps clients manage their emotions when they experience both negative and positive life events.
What is behavioral finance? Behavioral financial advice integrates traditional finance practices with psychology and neuroscience.
Why is it important? Behavioral financial advice helps improve emotional competency and decision-making behavior that increases effective use of the financial planning process with clients. It is about changing the conversation from predicting the future to helping clients prepare for the future.
Behavioral financial advice helps clients and advisors. Research suggests that financial stress may contribute to clients’ inability to fully understand the implications of financial planning. Behavioral finance has significantly enhanced our understanding of real-world financial behaviors and has given advisors insight into the underlying behavioral biases that cause clients to make irrational decisions. While examining the irrational behavior of individuals in the context of personal finance, behavioral finance focuses on how individuals behave, explaining why they make the choices and have the biases that they do.
Financial advisors implementing behavioral finance concepts effectively with their clients not only help clients stick to their plan, but also help to differentiate themselves from other advisors. Having these types of conversations provides insight to know when clients may be exhibiting behavioral biases. It allows the advisor to take a client from a reflexive response, such as wanting to sell at the market bottom, to a reflective response, such as reframing the situation so clients can effectively find or make a better choice.
Advisors can also employ the principles of behavioral finance to connect and engage with clients and prospects. Aligning clients’ values, goals and behavior allows the advisors to understand their clients on a much deeper level. As a result, this type of advice can lead to advisor business growth.
Ultimately, the key point is advisors can use behavioral finance principles to effectively help their clients make better choices and stick to their plans with a more coaching-oriented approach.
Incorporating behavioral advice gets results. Top advisors who integrate behavioral finance into their practices report they have increased production and revenue, increase their planning fees and acquire more new clients.
Integrate behavioral finance into your practice. When it comes to financial success for clients, 87 percent is determined by client behavior. There are four steps to introducing behavioral advice to clients:
- Build rapport. Rapport is defined as a relationship of mutual trust or emotional affinity, which is necessary when discussing one’s behaviors.
- Set the stage. Have a conversation with clients about behavioral finance.
- Assess financial beliefs and behaviors. Explore underlying assumptions or beliefs around money.
- Values exercise. Have a values-based discussion, and learn what is important to them.
- Put it in writing. Keep values in the client file and what the plan will be in anticipation of future situations. Outline the behaviors that the client is likely to experience in writing.
How do you get started? Obtain a behavioral financial advisor (BFA) designation. Which program is best for you? How do you want to use it in your practice? Will you charge a separate fee? How will your clients feel about this approach? These are a few questions to ask when determining whether to introduce behavioral financial advice into your practice.
The benefits of behavioral financial advice include:
- Understanding. This will lead to a deeper understanding of your clients, their values and what is important to them.
- Branding. With a BFA designation, you can differentiate yourself from the competition. Financial products and advice are becoming commoditized. Behavioral advice has low risk to be commoditized. Brand yourself as the advisor who helps their clients make better choices based on their values.
- Opportunity. Have discussions with your clients and prospects about how you are not the advantage financial advisor. This will lead to more opportunity for clients as well as your becoming a thought leader in behavioral finance.
As you prepare to introduce behavioral finance into your practice, be patient with the process. Conduct rediscovery meetings with existing clients and introduce prospects to your process at each initial meeting. Remember, practice makes permanent.
