While a seasoned financial planner may have balked at the risks tied to buying meme stocks or joke-born cryptocurrencies this year, investors could easily get caught up in the thrill of big returns and the excitement of getting one over on well-established hedge funds.
Emotion, especially ones that heighten the thrill of a win, financial behaviorists know, is at the heart of why so many people make investment decisions.
“It gets to the fact of why behavioral finance is so important when you're an advisor because it's the emotion that really does drive people when it comes to making decisions, especially about their money.” said Lindsey Bell, chief markets and money strategist at Ally. “People get excited about things. They jump into things like that. … And so as an advisor, I think what you need to do is really think about is, ‘How do I help my client really combat these biases?’”
Bell joined Mallon FitzPatrick, managing director at Robertson Stephens Wealth Management, and Sonya Lutter, director of research and academy at Herbers & Company, Monday as part of a panel discussion on behavioral finance at this week’s Financial Planning INVEST Connect conference. The session, “Rethinking and Reshaping Wealth Management with Behavioral Finance,” delved into topics related to psychology and investing and how advisors can better understand clients to improve investing outcomes.
Past as a guide
Touching again on the meme stock frenzy and its implications, FitzPatrick suggested that advisors keep clients focused on the process and the goals they set out when their relationship began.
“When we're asked about a hot investment so to speak, we take the client back to the financial planning process. Where does this fit into your plan? How does this help you better achieve your goals? Does it put your goals at risk?” FitzPatrick said. “It's not telling them they shouldn't or should. It's (that) they can see the actual impact. Now that's not to say that they shouldn't invest at all, but we can understand the amount they can actually risk on such a thing if the stock went to zero.”
Bell said advisors often have institutional memory that clients don’t. There are opportunities to use that wisdom to guide decisions.
“One of my favorite ways to think about doing that … is really pointing to the past and remembering the past or what happened. If you want to point to the dot-com bubble and a story like pets.com or things like that, just reminding folks that we've seen this story play out before in the past, and this is how it could potentially turn out,” Bell said. “That doesn't mean you can't be invested in any of these types of fads or trends that are driving your emotions. But be thoughtful and cognizant about how much money and how much of your portfolio, how much of your livelihood that you've worked really hard for, are going into those types of investments.”
Core money beliefs
Chana R. Schoenberger, Financial Planning editor-in-chief and the panel’s moderator, asked the experts to talk about the drivers of an investor’s decision-making process. Early life events are key, they said, as is physiological stress that has been a hallmark of the last two pandemic-filled years.
“When our brain is unable to process events rationally, really what's happening is this physiological response of the flight or fight. And when our brain enters into that pattern, it's very hard to make decisions and very hard to think about future-oriented actions,” Lutter said. “We are living right there in that moment and making reactions based off of emotions and just quick decisions based off of past experiences. So helping clients get out of that heightened physiological state, I think, is a really key driver in terms of getting them to implement their financial plan.”
FitzPatrick said advisors can gain a lot by understanding how past events influenced clients’ attitudes toward money.
“If you grew up in the ’70s with high inflation, bonds sound like a wealth destroyer. Right? So you have a bias against those types of investments. If you grew up in the time we're experiencing now, you are ‘rah rah stocks.’” FitzPatrick said. “You can't always change behavior. If you think that it will negatively impact their plan, what you can do is understand where those clients are coming from, help assess, work together to assess their financial behavior, and there's many tools you can (use to) do that, which is a good starting point for a conversation with the client.”
Balancing out couples
Traditionally, men in relationships have been more hands-on when it comes to investing. But as relationships change, advisors must put emphasis on understanding the needs and wants of both partners in a relationship.
“What the financial advisor needs to do is practice empathy and pay attention to what's going on,” Lutter said. “Even if the man in that particular situation is the one who called the appointment and maybe he's more vocal during the meetings, take a break from that and focus all of your attention on the person who's not saying quite as much because, more than likely, they have their own ideas and they are likely quite independent and ready to take action when given just the tiniest little space to implement some of their own ideas.”
That means advisors have to pay close attention to relationship dynamics to ensure that they serve both clients and let both parties know that their input is valued.
“If you have a couple in front of you, one person's not saying anything, you need to let them know that you are the neutral, non-biased party in the room, and you're here to help the couple as a combined entity,” Bell said. “You need to begin asking the person that's being a little quiet what their feelings are, what their thoughts are, what their rules are for their money. … I always tell people, ‘you need to know where your money's at and how it's working for you.’”
