Leveraging Behavioral Finance to Calm Clients During Downturns

Herbers & Company Describes Behavioral Finance and How Advisors Can Apply it When Guiding Clients Through Turbulent Markets

In the wealth management world, we often think of academic studies as siloed solely in the domain of crunching data and forecasting, so when markets go pear-shaped we ignore academic solutions as investors abandon forecasts for emotions, but that’s a mistake. A field of academic studies – behavioral finance – directly addresses emotions. 

Behavioral finance merges decision-making psychology with financial markets, revealing tools to soothe rattled nerves and guide clients back on track with their plans, goals and long-term, rational decision making. 

To understand behavioral finance, we spent time with Sonya Lutter, CFP, PhD, the Director of Institutional Research & Education at Herbers & Company’s Academy.  

Herbers, a strategy, management and innovation consultancy serving a broad range of independent advisory firms, established the Academy as a training and educational arm. 315 new advisors enrolled in the Academy since mid-2021.  

Dr. Lutter describes for us the field of behavioral finance, how advisors utilize it and the strategies it provides for advisors in counseling clients through stormy markets.

WSR: Can you give us a brief background on behavioral finance in general and how it’s applied by advisors? 

Lutter: Behavioral finance is the study of how people make money decisions, focusing on individual biases, lack of self-control and irrationality in the financial decision-making process that may affect the subject’s personal financial situation and the financial markets. 

Behavior finance is systemic – people make financial decisions based on watching their peers, talking with significant others and family, watching the news, reading articles and interactions with professionals, to name a few. It can be applied to individual clients making decisions about their personal finances and business leaders making decisions about how they run businesses.  

For financial advisors, behavioral finance is useful in financial planning and investment management engagement. Financial advisors can learn the behaviors of their clients to help them be more prepared, informed, rational and capable of making sound financial decisions in hard times. 

Divulging personal information is scary – under stress, people react with sudden habit-based and emotional actions. Financial planners with strong, trusting client relationships can help them maintain open, meaningful money conversations in a safe environment and steer clients toward more rational decisions that benefit their personal financial plan and investments.  

To do that, financial advisors must pay attention to the process the client is experiencing versus the content of what is being said, asking how clients feel or what they think, listening for cues that indicate personal values such as security, family or philanthropy and watching for indicators that reflect happiness or fears, such as smiling, holding a partner’s hand when certain topics arise and in the case of fear, talking fast or withdrawing from the conversation.  

WSR: What advice based on behavioral finance can you give to financial advisors specifically to help their clients in turbulent markets? Is there any specific coaching you’re giving to your financial advisors during the current market instability?  

Lutter: During turbulent markets, Herbers helps financial advisors increase their communication skills with clients. As an example, we have a program at Herbers Academy that helps advisors ‘Master Interpersonal Communication’ by understanding how to be patient with the client and read non-verbal cues. With deeper interpersonal communication skills, financial advisors can navigate a client during turbulent and stressful periods.  

The most important skill is paying attention to physiological indicators of stress. Smart watches, for instance, provide tangible data about how prepared we are to make decisions. If our heart rate is elevated outside of physical activity or if our hands are cold, we might be stressed – all of which means we are myopically focused – the opposite of what is required to make sound financial planning and investment management decisions. 

At the very least, whether in-person or virtual, stand during client meetings and ask the client if they are willing to stand when experiencing stress. Physically moving puts the brain in a different state of being almost instantly. The best thing advisors can do is not fear deeper conversations with clients who are angry or anxious. Simply being with them and hearing them conveys commitment, stability and a focus toward the future. 

Michael Madden, Contributing Editor & Research Analyst at Wealth Solutions Report, can be reached at mmadden@wealthsolutionsreport.com