Taking a behavourial approach to clients' finances

22 August 2023
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Understanding your clients behavioural and psychological barriers can not only change and deepen the conversations you have with them but it also offers you a unique service proposition for your marketing and a way to boost overall engagement.

Clients need advice and guidance on a range of issues and will begin their advice journey because they have reached a lifestage or milestone that requires professional assistance to navigate.

But their relationship with money began years before and helping them understand it will remove barriers to them understanding and accepting guidance and will also help advisers create a relationship that goes even deeper - ongoing engagement and advocacy for their services.

Breaking down barriers

Financial wellbeing can be determined by a series of behaviours - engaging with money and budgeting, planning for the future and saving for it are great predictors of healthy financial wellbeing but then there is the clients' relationship with money - driven by their psychology and emotions - which has often been formed during their childhood and either helped by their parents or, as often the case, hindered by their parents own financial situation and psychology.

Take savings as an example - understanding why someone saves and how they view their savings will help remove potential barriers to acting on sound financial advice. Does your client or their partner demonstrate a lack of willingness to invest rather than save because they rely on the security of the nest egg sitting in their savings account?

Understanding this will help you deliver advice and product recommendations that work with their psychology to produce positive outcomes in the long run.

Helping clients make better decisions and creating advocacy

It is barely open for debate that the level of financial education that children receive is fairly low and often driven around developing save to spend behaviours. Financial education may not be a silver bullet but assuming knowledge that isn’t there may prevent your clients from implementing your advice.

Working with your clients financial capability at its current levels and helping improve it through education and on-going communications will help them engage and advocate for advice. Demonstrating expertise in behavioural finance and psychology also shows clients that an adviser has a deeper understanding of their needs and concerns. This expertise can build trust and credibility, as clients feel their financial adviser can address their unique circumstances and guide them through tough decisions.

Behavioural and psychological learning also helps advisers recognise cognitive biases that may cloud clients' judgement. By providing insights into these biases, advisers can assist clients in making more rational and well-informed financial decisions, leading to better long-term outcomes.

Biases such as loss aversion, anchoring and confirmation bias may prevent clients from engaging with your advice and product recommendations but if you understand when they are at play, you have a much better chance of helping your clients overcome them to plan for their future.

Managing risk and market differentiation

Behavioural finance practises can also help advisers identify clients' risk preferences more accurately. This understanding allows advisers to develop portfolios and strategies that align better with clients' risk tolerance, reducing the likelihood of impulsive decisions during market downturns.

Aversion to loss or recency bias will reduce clients risk tolerance but understanding this and working with them over time, will also help them develop an appropriate risk tolerance for the stage of life they are at.

By integrating behavioural and psychological learning into advice services, financial advisers can differentiate themselves from competitors. This unique value proposition can attract new clients who seek an advisor with a more holistic and empathetic approach to financial planning.

By taking behavioural factors into account, advisers can tailor financial plans that consider clients' emotional reactions to various life events and market fluctuations. This customisation can lead to plans that are more robust and better aligned with clients' goals and aspirations.

Overall, behavioural and psychological learning empowers financial advisers to become more effective and empathetic practitioners, leading to better outcomes for both clients and their businesses. It helps advisers connect with their clients on a deeper level and provide guidance that goes beyond mere number-crunching, ultimately strengthening client-adviser relationships and creating advocacy for their services.

Jane Monica Jones is a financial therapist at the Financial Wellbeing Company. 

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