How Does Behavioral Finance Play a Key Role in Advising Clients?
We asked financial planners and CEOs how behavioral finance plays a key role in their client advising strategy. From guiding clients to rational choices to removing emotion from finances, these experts provided seven unique insights. Discover how these financial professionals leverage behavioral finance to optimize their client advising strategies.
- Guide Clients To Rational Choices
- Craft Effective Investment Plans
- Help Clients Find Contentment
- Guide Clients To Long-Term Growth
- Understand How Clients Think
- Invest Based On Risk Tolerance
- Remove Emotion From Finances
Guide Clients To Rational Choices
Behavioral finance is crucial in my client-advising strategy because it helps me understand how emotions and cognitive biases can impact financial decisions. By recognizing patterns like loss aversion or overconfidence, I can guide clients toward more rational, long-term choices. For example, during market volatility, I often remind clients to stay focused on their overall goals rather than reacting to short-term market swings. Incorporating these behavioral insights allows me to create personalized strategies that help clients stay on track, reducing the risk of emotional decision-making derailing their financial plans.
Craft Effective Investment Plans
Behavioral finance is integral to my client-advising strategy because it provides insights into how psychological factors influence investment decisions. Understanding biases such as overconfidence or loss aversion helps me tailor strategies that align with clients’ actual risk tolerance and objectives. By addressing these behavioral tendencies, I can craft more effective, personalized investment plans and better manage client expectations. This approach not only enhances decision-making but also improves overall financial outcomes. Integrating behavioral finance principles ensures that my advice remains relevant and responsive to each client's unique psychological profile.
Help Clients Find Contentment
Behavioral finance is the bedrock of any successful financial life. If someone can find a healthy balance of spending, earning, and being content with what they have, then they are 80% of the way to having a great financial life. The most difficult piece of this puzzle is the contentment with what you have. An easy hack to help with this is to have friends who don't have as much money as you. The bar is lower in everyday conversation, and you don't feel behind financially in every conversation. Lastly, when it comes to controlling spending, I always recommend waiting two weeks to buy something. Leave it in the cart, and if you still want it after two weeks and it's affordable, then buy it. This can help with impulse spending.
Guide Clients To Long-Term Growth
In my advising approach, behavioral finance helps me guide clients towards long-term investment strategies. By addressing common biases, like the recency effect, I help them avoid reacting to short-term market swings.
Instead, they can make decisions based on sound financial principles, keeping their broader goals in mind. This focus on steady, long-term growth rather than short-term gains allows clients to stay calm and focused, even during volatile market periods.
Understand How Clients Think
Behavioral finance is extremely important. Before you can make any financial decisions, you need to understand how you think. The starting point of every financial-planning relationship for me is understanding the client and the lens of how they look at financial planning. Without that, advice is generic and not specific to someone. At the end of the day, the best plan is the one you believe and can stick with.
Invest Based On Risk Tolerance
I think it is important to first listen to the client's concerns. If I disagree with their fear or concern, I will try to educate them on why I think their fears are unwarranted. However, at the end of the day, I will invest based on their risk tolerance.
Remove Emotion From Finances
I often tell people I'm 10% financial advisor and 90% therapist. When I meet with clients, whether husband-and-wife or business partners, everyone has their own feelings about money, personal goals, and what keeps them up at night. A primary focus of mine in advising clients is to remove emotion from the financial planning process; emotions and money never work well together. Investors can't afford to get too high or too low, which can be tough in a 24/7 news world built on selling dramatic headlines.
I advise clients for 10-, 20-, sometimes 30-year outlooks, and staying the course can get derailed by looking at stock reports by the minute with a click on your iPhone. I encourage clients to be honest with themselves when thinking about their risk tolerance and investment horizon, especially newer investors. Many people think they're aggressive, and then as soon as the market turns, they panic, and some think they're conservative, but as soon as the market rallies, they want in. Long-term, patient, and calm planning wins the day.
