September 2024
Behavioral Finance
Behavioral Finance combines psychology and economics to understand how people make financial decisions. It challenges the traditional assumption that investors are purely rational and instead recognizes that emotions, biases, and cognitive errors can significantly influence investment behavior.
LPL Financial holds quarterly group sessions with financial planners from across the country to discuss topics that pertain to how they take care of their clients. The AdvisoryOne Group’s very own, Erin Juley Dahlenburg, had the opportunity to present on how the Behavioral Finance Advisor (BFA) designation has helped her assist her clients align their own personal values with their life goals.
The following is a transcript of Erin’s Q & A:
In your own words, what does it mean to be a behavioral financial advisor?
“To me it means I am better prepared to help my clients achieve their goals by helping them to reflect on their own values and decision making.”
What influenced you to pursue formal education around behavioral finance and when did you start applying it in practice?
“I have an undergraduate degree in psychology, so understanding human behavior has always been of interest to me, especially when it comes to money. I am not sure it is possible to fully separate the two. My parents are financial advisors, so money was usually spoken about often, but I realize that is not normal. I have been fortunate to know Doug Lennick, who is now the CEO of Think2Perform, for the majority of my career and I have been exposed to the idea of behavioral finance from the very beginning. To me they are one and the same.”
When and how do you explain the value proposition of behavioral finance to new and existing clients during the financial planning process?
“Typically, when I meet new or prospective clients I listen to their goals and intentions for seeking our financial advice. Then I explain that I work a little differently than most financial advisors. Not only do we meet with many of our clients every month, but we offer something called holistic values-based advice. I then explain some of what I have learned through the BFA program such as “Misery/Wisdom” diagram and that I help my clients align their decisions with their goals and their goals with their values, and I do that in a way that prepares them for the certainty of change.
For existing clients, it has been a slower introduction. I started off by telling them I just completed a new designation and what that means. Mainly everything we do is the same, but now we have added more value. As I went through this discussion with one couple, they mentioned to me that ‘this is like what we already do,’ and I replied ‘yes, it is! Now we just have definitions for everything.’”
Has any client/prospect received this negatively? If so, how have you approached it?
“No one has received it negatively. I did have a couple who did not see the relevance to finance. I may not have explained it well enough for them the first time, but they seemed to think it was an interesting idea. It was just not super important to them, and that is okay.”
Describe what you actually do with clients to capture their behavioral traits and values.
“We have a detailed fact finder that we go through at our first meeting which includes many behavioral questions, such as ‘when would you like to work because you want to, not because you have to?’ Then I introduce the value cards exercise and explain my own values to the clients before they begin. Once they complete the exercise, I ask why they chose their values. This is important because I may have completely different interpretations of a value then they might have.”
How do you refer back to the clients’ values when providing advice?
“I have a friend and mentor who makes sure to put the client’s values at the top of each meeting’s agenda (every quarter). I usually refer back to the client’s values as I am answering their questions of specific recommendations. For example, ‘You mentioned that you really value Autonomy, Happiness, Family, Education, and Wealth, has anything changed? Do you believe your value of Education and contributing to your child’s 529 plan is more of a priority than paying down your debt, which may be associated with your value of Autonomy?’
In this instance, I may recommend we go through an exercise that also lists their top 5 values in order of importance or priority.”
How often do you update clients’ values with them?
“I would recommend it at least every year, just to confirm if anything has changed. Often times, 3 or 4 values remain the same, but there is a new one that has become important. I know my own top 5 values are a bit different than they were 5 years ago and may be different in 5 years. It’s always in flux.”
What are the benefits and results you are seeing after you have implemented more formal behavioral financial advice services into your practice?
“I believe my clients are able to make more rational decisions in the face of difficult and competing emotions. For example, we never get concerned calls when the market is down. I believe this BFA structure has allowed for my clients to feel more intentional in their decisions and can explain why each choice is important to them. It has allowed me to build another layer of trust and maintain an even higher retention rate.
Our retention rate was high before, but I know anyone new working with us will know exactly how we operate and what we value before they are onboarded. Verses having a real misalignment between a client and advisor that could result in us telling the client that we may not be a good fit for them.”
What advice would you give an advisor new to the concept of behavioral financial advice and values-based planning to become more confident to formally implement?
“I would highly recommend going through the BFA program, since it has provided me with all the tools and language to walk through these more in depth and possibly difficult conversations. At the end of the day no one can argue that humans are emotional creatures, just open any news publication and see how you feel. We all make better decisions when we can step back and be more mindful of our actions. Behavioral finance is just another tool that can help us better serve our clients, in whatever way you can implement this new knowledge or the exercises, it should have a positive effect on your relationships and your client’s behavior.”
Often, in their first meeting with an advisor clients express that they feel like their personal financial checklist is weighing them down. By first discovering their core values, they can then better focus on which goals align with their values and subsequently feel a much bettersense of direction. Do you think behavioral finance plays a role in your life? To discover your own personal values, please visit www.advisory-one.com/values-exercise.