When returns are high and markets are stable, the client-advisor relationship is smooth. But when market returns are down or if prices are volatile, financial advisors often struggle to remind clients of their long-term goals. The field of behavioral economics can help advisors with these conversations.

At the Morningstar Investment Conference in Chicago on Monday, Stephen Wendel, head of behavioral sciences and Sarah Newcomb, behavioral economist, both at Morningstar, gave advisors tips to handle investor psychology.

Change the story. When the markets fall, it can be hard to reassure clients. Wendel said while advisors know that declining prices means better valuations, it can be hard to stay the course if clients are panicking. 

Advisors need to alter the prevailing story by changing their language and knowing how to interpret events. One way is to call it a greater opportunity for profit, he said.

“As the markets are dropping, the chances for gain are increasing,” Wendel said.
Conversely, when prices are rising and clients are feeling overly confident, that’s when financial advisors should start to feel skeptical because the opportunity for profit is less as valuations are high.

“The story matters. The facts themselves are dead. The interpretation is important; it’s the architecture of meaning,” he said. “Change the terms.”

It’s not a budget, it’s their personal economy.  The old budgeting method looks at how money is moving, but not how it moves or how it can motivate behavior. Instead, a personal economy is a holistic way to help clients understand how their short-term behavior affects long-term goals, Newcomb said.

Advisors should review clients’ needs and the strategy to meet their needs. That makes budgeting feel less like a diet and more like a map to get them where they need to be.

For instance, let’s say a client’s boat expenses are putting a hole in their budget. Rather than selling the boat, perhaps have the client downside the boat or use it to give sailing lessons. That meets the client’s desire to have a boat and socialize with others while also bringing in extra money.

A personal economy worksheet lets clients think about how and why their money moves as it does. And during the discussion it’s important to not tell clients what to think, but rather to work with them to discover a strategy.