Today’s wealth landscape looks vastly different than just 10 years ago – even 5 years ago. Rapid advancements in technology have opened the doors for investors of all levels to be able to access a wide range of financial products and services. And from outside the world of financial services, tech has created an environment where fully customized experiences are now the norm. 

For financial advisors seeking new ways to set themselves apart from their competition, offering a range of investment portfolios and solutions may not be enough. Clients expect experiences above and beyond what they can access themselves through technology. A 2022 Vanguard study on the value of human and robo-advice notes that the value of advice consists of portfolio value—i.e. building and implementation of investment portfolios, financial value—i.e. reaching financial goals, and emotional value—having financial peace of mind that includes behavioral coaching.1 In short, client expect a relationship and guidance from their financial advisor.  

The idea of how psychology impacts investing—often referred to behavioral finance (or “be-fi”)—is really about understanding how humans think and act when it comes to their financial decisions. In a world of robos and DIYers, understanding these behaviors can help advisors differentiate themselves and help their clients achieve better outcomes through more personal wealth experiences. 


What Drives Investment Decisions?

The answer, surprisingly, isn’t data. Well, not exactly. The fact is, most investment-related decisions are not entirely made based on analysis and financial data. While it may play a role, decisions are also influenced by psychological factors – cognitive biases that are often deeply engrained into an investor’s mind. Those biases can either contribute to or significantly hinder long-term success. 

According to the NeuroLeadership Institute, some of the most common cognitive biases that impact decisions are:

  • Similarity bias – a preference for what is similar over what is different
  • Expedience bias – a preference to act quickly rather than take time to deliberate
  • Experience bias – a tendency to believe our own truth of experience
  • Distance bias – a preference for what’s closer over what’s further away
  • Safety bias – a preference to protect against loss over seeking out gains2

 

FREE RESOURCE


Looking for more educational resources? Grow your business and meet CE requirements with our free learning platform.
 

Learn More

 

Some other biases include mental accounting – treating money differently depending on where it came from and how it might be used, loss aversion – the tendency to avoid loss rather than seek gains, overconfidence - the tendency to think we know more than we actually do, anchoring bias – placing too much value on an initial piece of information, and herd behavior – making decisions based on what others do.
 
The effect of these and other biases on an investor’s success can be consequential. For example, an investor may choose to invest in a security with a less than stellar performance history because it may be similar to a holding they have that has performed well. 


Managing Investor Behavior and Emotion

For advisors, cultivating meaningful relationships with clients includes understanding their motivations, both good and bad. And recognizing when a client is letting emotions like fear and greed impact their investments. As part of the value they bring to their clients, advisors should consider strategies to help mitigate and manage the behavioral biases of their clients. The BeFi Barometer survey of over 300 financial advisors indicated that while behavioral biases have been on the rise, employing strategies and techniques to address them has been successful.3 

Some of the most effective mitigation techniques include:

  • Encouraging clients to maintain a long-term view of their investments. This means regular reminders of their goals and helping to ensure they stay on track with their plan. 
  • Implementing a goals-based planning approach that helps clients prioritize their goals and follow a plan to fund them
  • Maintaining a systematic investment approach to help reduce the decision-making that could be impacted by emotions
  • Leveraging technology to establish automated processes that help remove decision-making opportunities as much as possible

Staying aware of investor tendencies and biases and continually employing coaching techniques to help manage them. 

Other tactics include creating investment portfolios that account for investor biases and managing client expectations through clear communications. 


Why Behavioral Finance Matters

Financial advisors who incorporate behavioral coaching techniques in their practices can help clients stay invested for the long-term and build stronger, longer lasting relationships. Investors stand to benefit from their financial advisor’s understanding of emotional decision-making with more confidence and better outcomes.

 

FREE RESOURCE


Learn how outsourcing investment management empowers you to focus on delivering exceptional client service while meeting the highly personalized needs of today’s investors in our free whitepaper.
 

Download Now

 

 

1937-OAS-7/19/2023
1 Vanguard, Quantifying the investor’s view on the value of human and robo-advice, February 2022
2 NeuroLeadership Institute, “The 5 Biggest Biases That Affect Decision-Making,” August 2022
3 Investments & Wealth, Befi Barometer, 2021


Wealth Management services are offered by Orion Portfolio Solutions, LLC d/b/a Brinker Capital Investments a registered investment advisor.