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The widely studied field of behavioral finance has firmly established that many investors’ mistakes can be attributed to their emotions, which can cloud their judgment and overpower their patience and discipline. Ben Graham, arguably one of the best investors of all time, said, “The investor’s chief problem—even his worst enemy—is likely to be himself.”
Many financial advisors think their most important function is to devise financial strategies and help their clients allocate their assets to help them achieve their financial goals. Certainly, that’s important. But that’s what advisors study and train for. It’s what they do.
However, I would argue that the most essential function—the critical role advisors must fulfill—is that of a financial coach. Above all else, a financial or investment strategy rooted in sound practices and principles requires discipline and patience. However, when emotions cause a client to break from the strategy, you are the only person who can keep your clients anchored and coach them through the momentary instinct to act irrationally.
Addressing these behaviors proactively can help your clients stay on track and make sound decisions. Here are five common client behaviors that financial advisors should be prepared to address and strategies to manage them effectively.
#1. Ignoring budgeting and spending plans
Some clients fail to adhere to their budgeting and spending plans, often spending beyond their means. This behavior can severely impact their ability to save and invest, leading to financial instability.
Solution: Assist clients in creating a realistic and sustainable budget that aligns with their financial goals. Emphasize the importance of disciplined spending and the long-term benefits of adhering to a budget. Financial planning software can be instrumental in tracking spending and savings, providing clients with a clear picture of their financial behavior.
Regularly review their budget and financial plan to keep them accountable and make adjustments as necessary. Encourage clients to set up automatic savings plans and provide practical tips for reducing discretionary spending. Highlight the impact of overspending on their long-term goals to motivate adherence to the budget.
#2. Being unrealistic about goals
Clients sometimes set financial goals that are too ambitious or unrealistic, given their current financial situation. This can lead to frustration and a lack of progress, ultimately discouraging them from pursuing their financial objectives.
Solution: Work with clients to set SMART (Specific, Measurable, Achievable, Relevant, Time-bound) goals. Conduct a thorough financial analysis to establish a clear picture of their current financial health and adjust their goals accordingly. Use financial modeling tools to project potential outcomes and set realistic expectations.
To keep clients motivated, regularly update them on their progress and celebrate small victories. By setting achievable milestones, clients can experience a sense of accomplishment, encouraging them to stay committed to their long-term goals. Additionally, you should provide continuous education on how incremental progress can compound over time to achieve significant results.
#3. Chasing market trends
Clients are sometimes tempted to change their investment strategies based on the latest market trends or sensational news stories. As a result, they often pursue stocks when prices are high or sell when prices start to fall, driven by emotions rather than rational analysis.
Solution: Educate clients about the importance of a long-term investment strategy and the dangers of market timing. Explain the concept of market volatility and how emotional decisions can lead to suboptimal outcomes. Use historical data to show the benefits of staying invested and the risks of trying to chase trends. For instance, illustrate how missing the best market days can significantly impact overall returns.
Schedule regular reviews to reassure clients about their progress toward their goals and reinforce the importance of sticking to their plan. Your most important function is to keep clients focused on their long-term objectives.
#4. Avoiding discussions about debt
Clients may avoid discussing their debt or may not fully disclose all their liabilities, either out of embarrassment or because they do not see it as a priority. This avoidance can undermine their overall financial strategy.
Solution: Foster a non-judgmental environment where clients feel comfortable discussing their debt. Emphasize the importance of having a comprehensive understanding of their financial picture, including all liabilities. Develop a detailed debt repayment plan that integrates into their overall financial strategy. Use tools such as debt consolidation calculators and repayment schedules to provide clear and actionable steps.
Review their progress regularly and make adjustments as necessary. Highlight the long-term benefits of reducing debt, such as improved credit scores and increased capacity for saving and investing. Encourage open communication and reassure clients that addressing debt is critical to financial health.
#5. Procrastinating on financial decisions
Clients often delay making critical financial decisions, such as updating their will, purchasing insurance, or adjusting their investment portfolio. Procrastination can lead to missed opportunities and increased financial risk.
Solution: Break down complex financial decisions into manageable steps and set clear deadlines for each task. Use reminders and follow-ups to ensure tasks are completed promptly. For example, create a timeline for updating estate plans or purchasing necessary insurance coverage and schedule periodic check-ins to monitor progress. Highlight the potential consequences of inaction, such as the financial impact on loved ones or increased exposure to risks, to motivate timely decision-making.
Provide clients with resources and education to simplify the decision-making process, such as informational brochures or webinars on relevant topics. By making the process less daunting, clients are more likely to take action.
The Bottom Line
Addressing these five client behaviors— ignoring budgeting and spending plans, being unrealistic about goals, chasing market trends, avoiding discussions about debt, and procrastinating on financial decisions—requires a proactive and supportive approach. You can significantly enhance your clients’ financial well-being by educating them, fostering open communication, and providing continuous support. Helping clients stay disciplined and focused on their long-term goals ultimately leads to more successful financial outcomes and a stronger advisor-client relationship.
Related: Challenges Advisors Face in Client Financial Planning