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A Guide to Helping Investors Overcome Behavioral Obstacles

Examples of behavioral finance tools to use in your practice

Samantha Lamas

 

Have you ever had a client who’s likely to run out of money during retirement but still takes a European vacation? Or maybe you've had a client who has more money than he or she would ever need but is afraid to take a nice trip? 

Financial advisors are in a unique position to help clients set the right investments and create a sound plan, but that’s only half the battle. The other half is helping clients stay in control of their emotions and avoid common mistakes. By harnessing behavioral finance strategies, advisors can help their clients stay on track to achieve their goals.  

The benefits of incorporating behavioral finance tools in your practice  

Our minds take shortcuts when confronted by tough choices, and behavioral finance focuses on helping investors overcome the common problems caused by this process. In most instances, these shortcuts work in our favor. For example, when a car is speeding toward us, we don’t take a minute to calculate the probability of getting hit by the car. No, we jump out of the way. But in finance, these gut reactions are the reasons why we chase a new, hot investment or cash out when markets are going down

In this new age of regulatory murkiness, technological advancement, and increased competition in the financial advice industry, you can use behavioral finance to help you stand apart from the crowd and help your clients stay on course.  

Morningstar has created a guide to help you implement behavioral finance techniques in your practice. The “Simple but Not Easy” guide provides examples of behavioral finance tools, insights, and techniques you can use to harness behavioral finance to help your clients achieve their goals.  

3 examples of behavioral finance tools from the guide to try in your practice: 

  1. Financial personality matrix. You can use this framework to get to know your clients on a psychological level, better understand their behavioral tendencies, and how to prepare your clients for addressing them. 

  2. Personal economy worksheet. This tool helps advisors get a holistic view of their client’s finances to make it easier to identify a client’s needs and goals. 

  3. Letter to your future self. For clients that are having trouble sticking to their long-term goals in times of volatility, you can use this exercise. It can help your client manage their emotions. 

Download “Simple but Not Easy” for more examples of behavioral finance tools and techniques.  

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