Clients pick advisors for many reasons beyond financial needs.
Behavioral financial planning is the development of
practical techniques to improve decision-making. From a financial
standpoint, it looks at human weaknesses and ways of overcoming them to
bring [a client] closer to [his or her] goals.
Financial planners have a multifaceted role in behavioral analysis in both money- and life-planning areas. In money planning and life planning, they can provide the benchmark of financial performance required by clients to achieve their goals as well as the overall planning methods for meeting them. Their role, often as the client's closest advisor in financial affairs, can provide access to both personality and motivations. They are aware of client weaknesses and can point out specific ways to overcome them. If the problem is one of control, they can establish structures, such as savings "buckets," to support control procedures. They can point out unrepresentative feelings, such as certain clients' belief that they are not acting responsibly in financial affairs when, in fact, they are. Many financial planners teach their clients how to understand finance and have more positive performance in the future.
As discussed, well-being does not just come from monetary rewards. Instead, there are a host of factors that people often look for. They may select an advisor not only for competence in financial matters, so that they can achieve their money goals, but for assistance with human-planning needs. Through hard data and a reassuring manner, they can enhance positive feelings. A select number use advisor's knowledge of client's financial facts to help them with life planning. Let's look at some common nonfinancial needs of people that financial planners can help with.
To trust. People seek advisors whom they feel they can trust to represent their best interests and give them straightforward advice. If there are potential conflicts between their interests and those of the advisor, they want them disclosed.
To find an interested person. Talking about a problem can be therapeutic. Advisors who listen with interest to clients' problems are often viewed as good communicators, not just good listeners, and they are highly thought of even when they are not proposing a potential solution.
To understand. People want simple advice that they can evaluate themselves, or they at least want to understand why the advisor is making a particular comment or recommendation. Communication in easy-to-comprehend terms is part of simplicity. If advice is complicated, people may not take it all or may feel unintelligent.
To help establish goals. Goals are not always immediately known. People appreciate techniques provided by advisors, such as leading questions, or just extensive discussions that assist in eliciting those goals. Being nonjudgmental and empathetic can help the process.
To feel secure. Being financially secure and feeling secure, while synonymous in rational finance, are not always the same in practice. For example, a recommendation can be made to establish a core position in real estate investment trusts that is expected to have attractive returns, relatively low market risk, and less correlation with other equities. However, the client may feel very uneasy because of unfavorable past experiences with real estate. In general, client feelings should be taken into account and alternatives to initial recommendations may be called for.
To be served. Service can be used to sum up many other factors such as competence, interest, and concern. More specifically, it includes the importance of understanding such things as timely responses, periodic meetings, specialized communications and actions that convey to clients that their interests are being kept in mind. A person who is well served is often able to overlook shorter-term negative outcomes, such as recommendations that underperform.
To be understood and appreciated. People want to have someone who understands them, their problems, and their goals, both financial and nonfinancial. To be understood can be comforting in itself and is often an important step in becoming receptive to recommendations. It is often as important for a client to be as aware of his or her strong points as of his or her weak ones. In fact, a reinforcement of the client's strong points will often boost self-confidence and motivate the client to finally tackle his or her weaknesses.
To improve competency. Many people want to become more knowledgeable, if only with the goal of self-improvement. This is particularly true in finance, which many view as complicated. Thus, advice should be explained, even when it isn't necessary for decision-making purposes.
To enjoy interacting. People want to deal with others they feel good about interacting with. The pleasure can come from the factors listed above, and others such as sharing similar interests with people who are lively and empathetic.
Behavioral financial planning is not so much an alternative way of looking at personal financial planning as it is a practical supplement to it. Knowing what motivates people and finding ways of improving results is what behavioral planning is all about. It should be measured by its accomplishments in achieving these objectives.
The above article is an excerpt from
Personal Financial Planning, a new book written by Lewis J. Altfest and
published by McGraw-Hill/Irwin. Alftest, a Ph.D., author and associate
professor of finance at Pace University, has been a financial and
investment advisor for more than 20 years. His firm, L.J. Altfest &
Co. Inc., is a fee-only financial planning and investment management
firm in New York City.