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Seasoned advisors know well that in many cases while PhD doesn't follow their names, there are very much elements of psychology and talk therapy involved with advising clients.
To that point, some advisors are getting attune to behavioral finance and that's a good thing. Even basic of knowledge of this concept is a solid addition to an advisor's toolbox.
“Behavioral finance, a subfield of behavioral economics, proposes that psychological influences and biases affect the financial behaviors of investors and financial practitioners. Moreover, influences and biases can be the source for explanation of all types of market anomalies and specifically market anomalies in the stock market,” according to Investopedia.
Now, advisors can get implement more aspects of behavioral finance into their practices thanks to Nebraska-based Orion Advisors. Orion Advisor Solutions is marrying behavioral finance with its best-of-class advisor tech stack.
Helping Clients Avoid Bad Decisions, Reduce Risk
As the old maxim goes, it's best to buy low and sell high, but not all clients do that and that's an important point for advisors to remembers because many clients will have accounts on the side that they control.
That's where they might be hiding some dubious investments and/or big losers. Worse yet is the abundance of research proving that investors make bad decisions under stress, meaning they're more apt to buy and sell at the wrong times. Orion can help advisors help their clients avoid those flubs.
“Orion will infuse academic research and behavioral psychology into the technology advisors use every day, including risk profiling and financial planning proposal tools,” the firm said in a statement.
Recent history confirm Orion is onto something by blending behavioral finance and tech. Take the case of the March 23, 2020 coronavirus market bottom. With the benefit of hindsight, we now that would have been a great time to buy stocks. Unfortunately, many investors didn't do that or they sold.
“It’s been proven that investors make bad decisions under stress. Buying and selling at the wrong time can wreck investor returns. When the market bottomed in March 2020, 1 out 5 investors sold all of their stocks, only to miss out on one of the fastest developing and largest bull markets just a few weeks later,” adds Orion.
Tangible Benefits with Behavioral Finance
Whether it's preventing clients from embracing small, fly-by-night cryptocurrencies or dumping an asset simply because it's correcting, advisors are already engaging in some level of behavioral finance whether they know it or not. Apparently, some know it because, as Orion notes, eight in 10 advisors say they're already using some behavioral finance techniques.
Advisors can enhance that with Orion’s 3D Risk Profile tool, which assesses client risk based on factors such as age, level of wealth, and financial proficiency.
For those still on the fence, consider the benefits to client outcomes in embracing more behavioral finance.
“The value of behavioral coaching can make a big difference in closing the behavior gap, which measures the loss an average investor incurs as a result of emotional responses to market conditions. Studies have shown that this gap can range from 1.17% to 5.35% per annum,” adds Orion.
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