HOW PRACTICAL APPLICATION OF BEHAVIORAL FINANCE CAN CREATE A SUCCESSFUL ADVISORY RELATIONSHIP

Wealth management practitioners have different ways of measuring the success of an advisory relationship. Few could argue that every successful relationship shares some fundamental characteristics:

■ The advisor understands the client’s financial goals.
■ The advisor maintains a systematic (consistent) approach to advising the client.
■ The advisor delivers what the client expects.
■ The relationship benefits both client and advisor.

So, how can behavioral finance help?

Formulating Financial Goals
Experienced financial advisors know that defining financial goals is critical to creating an investment program appropriate for the client. To best define financial goals, it is helpful to understand the psychology and the emotions underlying the decisions behind creating the goals.

Upcoming chapters in this book will suggest ways in which advisors can use behavioral finance to discern why investors are setting the goals that they are. Such insights equip the advisor in deepening the bond with the client, producing a better investment outcome and achieving a better advisory relationship.

Maintaining a Consistent Approach
Most successful advisors exercise a consistent approach to delivering wealth management services. Incorporating the benefits of behavioral finance can become part of that discipline and would not mandate largescale changes in the advisor’s methods.

Behavioral finance can also add more professionalism and structure to the relationship because advisors can use it in the process for getting to know the client, which precedes the delivery of any actual investment advice. This step will be appreciated by clients, and it will make the relationship more successful.

Delivering What the Client Expects
Perhaps there is no other aspect of the advisory relationship that could benefit more from behavioral finance. Addressing client expectations is essential to a successful relationship; in many unfortunate instances, the advisor doesn’t deliver the client’s expectations because the advisor doesn’t understand the needs of the client.

Behavioral finance provides a context in which the advisor can take a step back and attempt to really understand the motivations of the client. Having gotten to the root of the client’s expectations, the advisor is then more equipped to help realize them.

Ensuring Mutual Benefits
There is no question that measures taken that result in happier, more satisfied clients will also improve the advisor’s practice and work life. Incorporating insights from behavioral finance into the advisory relationship will enhance that relationship, and it will lead to more fruitful results.

It is well known by those in the individual investor advisory business that investment results are not the primary reason that a client seeks a new advisor. The number-one reason that practitioners lose clients is that clients do not feel as though their advisors understand, or attempt to understand, the clients’ financial objectives—resulting in poor relationships.

The primary benefit that behavioral finance offers is the ability to develop a strong bond between client and advisor. By getting inside the head of the client and developing a comprehensive grasp of his or her motives and fears, the advisor can help the client to better understand why a portfolio is designed the way it is and why it is the “right” portfolio for him or her—regardless of what happens from day to day in the markets.