How to Manage Your Client's Behavior Gap to Improve Financial Performance

Do you know how to improve client retention and financial performance by understanding financial behavioral biases?

You may be asking what exactly is the behavior gap? Can it be bridged? Yes; it’s just a matter of developing Financial EQ through behavioral awareness.

Good questions for financial advisors to ask and answer:

Why do some investors repeatedly lose wealth and others accumulate it?

Why after significant time spent working on an investment policy statement do investors react in the moment and revert to long-held beliefs that may hurt their returns?

Is there more to investing than just analyzing numbers and making decisions to buy and sell various assets and securities?

How aware of their own behavioral bias are investors? How aware are you as a financial advisor, of yours?

For investors to be financially successful, they need to be able to manage their “emotional reflex system” when events happen; they can’t control the markets, but they can understand how to manage their reaction to them.

The behavior gap doesn’t just apply to investors; as a financial advisor you are equally likely to be suffering from behavior gap. Your thinking and actions are influenced by the same set of factors and biases that affect investors in their financial decision-making process.

Qualities such as investing time in building relationships to build trust will help keep clients from making emotional investment mistakes. However, using a highly validated discovery process with clients can reveal decision-making behavior immediately. Further, it uncovers goals and aspirations for their future and importantly it will also reveal biases that will need to be managed.

According to Carl Richards in his book 'The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money’ he observes:

It’s not that we’re dumb. We’re wired to avoid pain and pursue pleasure and security. It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right but it’s not rational.

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Simply put – this is an emotional response due to behavioral bias; it’s a deviation from logic and reasoning right at the point of decision-making; under pressure, it’s our go-to’ inherent decision-making behavior; a gap that must be bridged if the client/advisor relationship is to be sustained.

5 Tips to cure’ the Behavior Gap:

Acknowledge there is one. Find out what triggers emotional reflex systems, that is, the inherent go-to’ decision-making approach.

Don’t just focus on the behavioral bias of investors. You as a financial advisor will want to be successful in your peer group. You might be driven by reputation, compensation, building business, managing investors’ expectations. Never assume’ that as a professional you are not biased.

Carefully review client’s goals, financial capacity; drill down to learned behaviors, experiences, values, and education. Get below the surface.

Every person has an inherent hard-wired behavioral style which is the core of who they are and can be predicted with the right discovery process.

Communication is the key: you must understand how to uncover a person’s unique communication and learning style. Customize your approach to your investor’s individual behavioral style- only then will you bridge the behavior gap.

Behavioral psychologists have long understood that people are not entirely rational. We’re influenced by a range of factors, from emotion to cognitive biases, which make a less rational choice seem more appealing.

If financial advisors are to understand the behavior gap that will exist both for them and their investors they need to learn about cognitive biases and other irrational behavior. Gaining this insight will deliver more effective and informed decision making which will stand up under market pressure.