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How Behavioral Coaching Can Fill the Gaps Left by Financial Education

Techniques advisors can use to improve their clients’ financial habits

Sarah Newcomb

While some advisors see client financial education as a primary service, others aren’t convinced that it has real value—and recent research suggests that the latter may be right.

A meta-analysis studied the effects of financial education on behavior and came to two major conclusions:

  1. Whenever an effect was found for financial education on behavior, it was very small. In many studies, there was no effect whatsoever.
  2. As with other types of education, the knowledge gained was quickly forgotten.

Given these findings, it would be easy to write off financial education as useless. Yet, we can’t ignore the obvious fact that financial knowledge matters. Without it, financial experts couldn’t add value. And if knowledge truly had no impact on behavior, financial experts would make the same bad decisions as novices.

So why, then, does financial education appear to have little or no effect on behavior? Many people point to the ineffectiveness of current education methods or the curriculum used. However, research has not supported these claims. In our research, we uncovered a few other factors that may be to blame for the feebleness of financial education.

Psychological factors that overpower financial education

Knowing the right thing and doing the right thing are two entirely different things. That’s because many times, other psychological factors get in the way of taking the correct path.

In 2014, before working at Morningstar, I conducted a study designed to compare the relative impacts of several factors on financial behavior. I chose to measure the effects of financial literacy, materialistic values, impulsiveness, and one’s conceptualization of the future. I then compared the effects of all four factors on self-reported financial behaviors.

The results showed that while financial literacy had a small but positive effect on financial habits, other factors had effects that were similar to, and often greater than, financial knowledge. In other words, someone who has a lot of knowledge but is also highly impulsive—or who thinks in the very short term—may still exhibit bad financial habits because knowledge on its own is not enough.

For advisors, this means that if these other factors are not addressed, financial education may never translate into action.

How behavioral coaching can help

Advisors can turn to behavioral-coaching techniques to reign in these disruptive factors. The concept of behavioral coaching is different from teaching, though some elements overlap.

Teaching is about knowledge transfer, while coaching is about action and skills. Teachers may lecture and assign work, but coaches are right there with people as they make their attempts to excel.

3 ways advisors can have a positive impact on their clients’ financial behavior

  1. Take a just-in-time learning approach to teaching clients. Memory retention research shows a clear pattern of knowledge decay over time. The rate of memory decay is exponential, meaning that it drops off extremely quickly. To combat this, research suggests that it may be better to offer important information just before it needs to be applied. In many ways, good advisors apply this rule intuitively. Information about the purpose and merits of annuities might fall on deaf ears if clients are focused on building a family. But as they approach retirement, and are curious about how to deploy their assets to ensure a stable income, they may make far better students. Advisors are in a unique position to foresee these changes and offer just what clients need to know at just the right time—before the memory fades.

2. Incorporating psychology in behavioral coaching techniques. Even with the best timing, memories decay. Here, we can turn to research on teaching and memory for additional tools to boost the likelihood of memory retention over time, such as the self-generation effect. Information is better remembered when it is generated from our own minds. Helping your clients remember an important concept may be as simple as asking them to put it into their own words.

3. Coach the whole person, not just the portfolio. Behavioral coaching goes beyond portfolio management to work with clients on developing and maintaining their motivation, fostering a sense of financial empowerment, and helping them create a vision for their financial future in which they are emotionally, as well as financially, invested. By understanding which areas of psychology have been shown to affect financial decisions, advisors can target their coaching efforts more efficiently.

While financial knowledge matters, it’s insufficient for changing behavior, especially when other mental factors work against our better judgment.

This blog post is adapted from an article that originally appeared in the April/May 2018 issue of Morningstar magazine. Read the full article  or subscribe to the magazine for free.

Read more about behavior-coaching techniques that target the areas of psychology affecting clients' financial behaviors.

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