Understanding and Guiding Client Behavior

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The events of this past year have created a backdrop of increased uncertainty for those involved in the financial world. Financial professionals face the complex challenge of effectively responding to the financial and emotional needs of their clients, while managing their own emotional reactions to the current turbulent markets.

Research in the relatively new field of behavioral finance confirms the influence of emotional reactions on financial decision-making. Sometimes these influences can manifest themselves in such basic things as resisting diversification or proper asset allocation. As a result, clients need advisors more than ever to combat knee-jerk, and often flawed, reactions to help get them back on the right track for their financial future. And make no mistake: business as usual is no longer an effective approach.

Manage, Minimize, Motivate

Advisors who possess effective strategies to manage clients’ anxieties while minimizing the impact of their emotions on financial actions and, ultimately, motivate them to engage in sound decision-making, will clearly have a competitive advantage.

Let’s look at these items separately and see how you can benefit from them.

Managing clients’ anxieties will require more effective communication and review processes with clients. This is the key to combating the challenges of irrational client behavior. By being an empathetic and diagnostic listener, you can engage in an intimate conversation with your clients to learn about their financial history and fears.

However, in order to understand the etiology of financial anxiety, it requires asking your client relevant, personal questions that you may not have discussed in the past. For example, you might ask a client to share a specific current or past financial event (i.e., poor credit rating, excessive debt, growing up poor) that could help clarify your expectations as an advisor.

By understanding your client’s key values, financial concerns and behavioral expectations, you can develop a plan that will allow you to guide your client more effectively. This might require getting out of your comfort zone, but the outcome can result in powerful information that will allow you to financially guide your client more effectively.

After you deal with clients’ anxieties, you then need to minimize the impact of their emotions on financial actions. Research has identified some key areas that affect investor thoughts, such as “fear of regret.” This is the emotional reaction people experience when they’ve made an error in judgment. For example, investors become emotionally affected by the price at which they purchased a stock. They avoid selling a stock that declines in value to avoid the regret of having made a bad judgment. The reverse can also be true: We regret our decision not to buy a stock that increases in value. So we start playing the “what if” game. One way to avoid this is to buy only well-known stocks because we somehow feel less embarrassed if we lose money on a stock that everyone else also owns.

Motivating clients to engage in sound financial decisions and create a financial-behavior plan begins with helping them fully understand how emotions impact decisions. This plan should not only reflect the reassessed financial goals of your client, but also should identify behavioral strategies for managing future anxiety and irrational thinking. The goal is to provide guidelines and expectations for advisor and client behavior that will encourage appropriate behavioral action, in spite of negative feelings and thoughts.

Behavioral Solutions

Advisors that utilize strategies for helping individuals shift their thinking to a more rational approach will likely be able to help their clients move forward during these difficult times. The key lies in asking the right questions and challenging clients’ assumptions. You want to identify your client’s irrational thinking and diffuse it with alternative rational statements.

For example, ask them to tell you their thinking that prevents them from taking financial actions. And challenge their beliefs by sharing some of the current research confirming the benefits of specific investment strategies for financial security.

Current conditions provide a wonderful opportunity for advisors to provide guidance, education and investment solutions for clients. The investorchallenge, while currently more widespread and intense, is not new.

Advisors that can provide effective behavioral and financial solutions will clearly enhance their perceived value, increase client loyalty and maintain their competitive advantage.


This article was originally published On Wall Street.

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