Applied behavioral finance can foster self-determination with your clients.
The underlying goal of our study of behavioral finance has been to create a method of application to every day financial decision-making. The research from social scientists and behavioral economists has allowed us to observe decision-making processes on a level we could not hope to do in our own practices. They in turn do not have the ability to affect any change based on their research because they do not have client relationships common in the financial advisory world. Our number one goal as thought leaders is to teach financial advisors and other professionals how to use behavioral finance to help build better financial decision-making processes for clients. This is the next step. We call it applied behavioral finance.
We have been speaking so far about concepts and provided examples of how these concepts manifest in ever day decisions to buy, sell, borrow, lend and invest. From these observations we can then apply our knowledge of behavioral finance to affect a positive change in everyday financial decision-making of our clients. This is where financial advisors become architects of decision-making.
Advisors need to help clients in forming an economically "rational," fully informed decision-making process from which to judge the merits of options and possible outcomes. In previous articles we have talked about the multitude of possible barriers to this process and barely scratched the surface. The goal then has to be to find a way to work with these barriers or work to remove them. By doing so, advisors can help facilitate resolution to difficult decision-making processes before they turn into impasse, dispute, stonewalling, withdrawal, or failure.
The number one priority is the creation and fostering of a fully informed decision-making process. A client without a complete understanding of all information will be affected by aversion to ambiguity and other cognitive barriers. In divorce proceedings, financial knowledge can be power. High-quality decisions need high-quality information from which to judge the options. The party without the knowledge must spend time and money collecting documents, reconstructing the balance sheet and income statement, and trying to level the playing field. This is the most important part of divorce financial planning, and building a good decision-making process in dissolution proceedings. Remember the theory of relativity that says we make decisions based on choosing one option relative to another. If a client is confronted with a decision that he must make based on limited information he runs the risk of reaching a poor conclusion. In the absence of options, clients must choose from what you know. The advisor's job is to help create additional options, analyze them for chances of success, and relay their analysis to their clients. A fully informed client can, and should, make his or her own decisions. This allows for self-determination and allows all clients to own their decisions.
The second priority is encouraging self-determination, as mentioned above. Building the fully informed decision-making process has started down this road but the next step as an advisor and architect of decision-making is helping the client make a decision. With all information in hand the advisor should be prepared to compare and contrast options and outcomes and the numbers may dictate a decision. If the numbers dictate that decision, it is important to guide the client through the process rather than jumping to the conclusion. Jumping to the conclusion will leave clients feeling as if they have been told what to do rather than having been given the opportunity to self-determine. Research has shown that divorcing individuals are far less likely to continuing fighting over odds and ends after the divorce if they are encouraged to reach their own conclusions through collaborative divorce or mediation. Self-determination is key because they recognize that whatever decision was made, it was their decision. Not the judge or attorneys. Status quo bias and other emotion-driven aversions to change can be huge road blocks to self-determination, making this a difficult proposition. It is a skill mastered by many mediators around the world, including those involved in financial decision-making processes of divorce (as we are).
Ultimately, advisors will need to encourage ownership of the decisions during and after the process is complete. Advisors should help clients understand the ramifications of their options as well as their final decisions. Safety and security are the front of most minds in difficult financial decision-making processes, so it is important to recognize the emotional value of conclusion. The conclusion can represent the end of a grieving process in a divorce or death. It can also represent triumph or excitement in the event of a business transaction or sale. Big wire-houses, banks, and insurance companies have recognized these emotional factors for a long time in their marketing efforts. They talk about fear of loss and aversion to change in advertising and then portray their clients as warm, happy, and content people--as if they have helped foster a safe and secure lifestyle. It is time that individual advisors began to recognize the value of emotion in their client relationships, make self-determination the standard rather than the exception, and always keep their individual client's financial reality at the front of financial decision-making processes as they become architects of decision-making.
Next month we will talk about specific scenarios where applied behavioral finance can be used by financial advisors such as family disputes, divorce, business transactions and more. We will also begin to talk about why financial advisors are ideal candidates to become dispute resolution experts and peacemakers and how applied behavioral finance fits into this practice.
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