The difference between how investors should act and how investors actually make decisions in the real world tends to be divergent. While some claim to be focused on long-term strategies, their actions seem to indicate something completely different. That intersection between economics, finance and psychology, known as behavioral finance, is a major topic of discussion when it comes to planning nowadays.

By nature, good financial planners are focused on customer service, return on investment and long-term planning. This approach is inherently designed to prevent erratic changes to a portfolio in a short period of time. But when clients have questions about the advisor’s approach, are they equipped to keep them on track?

Planners want to not only sell the best financial products, but also work with clients to create measurable goals and objectives, such as retirement or education savings instead of just selling the newest or most profitable products. They do this because they believe it’s the best route to consistent results. But at the same time, planners are afraid to say no to their clients because they are worried about them pulling their business if they don’t hear what they want to hear.

Here’s an example: let’s say a fast food company’s stock is included in a client’s portfolio. This stock has previously been agreed upon as a solid investment by both the advisor and the client. But one day the client visits a franchise of this establishment and has a bad customer experience. As a result, the client no longer has faith in the company’s ability to grow moving forward.

This may seem a bit silly or farfetched, but it’s the kind of scenario financial planners see all of the time. When it happens, planners can be forced on their back foot a bit. They either have to come up with a defense of the company and why they’re included in the portfolio or they’re put in a position where they end up having to sell for reasons they don’t completely understand.

When someone wants to make drastic changes to their portfolio, whether it’s adjusting to make a short-term purchase or dumping a stock due to a poor experience, planners needs to be able to gently push back if that request doesn’t align with the client’s long-term goals. While it may seem more advantageous from a customer service perspective to make a switch and use a more “high-profile” stock in order to remedy the situation, if the planner truly believes in that stock, they need to be able to have that conversation on why the change isn’t the best move.

While satisfying investors in the short-term may keep them happy, when their portfolio doesn’t perform due to the changes made, the risk is that the planner will be seen as nothing more than an order-taker. As such, the ability to make future recommendations could be affected. Even worse, the long-term impact could hurt the advisor’s credibility even if they didn’t believe in the initial change in investment being made. Since 70 percent of new business comes from referrals, retaining customers and long-term success provides a larger referral base than short-term gains.

In essence, behavioral finance is the mindset that equips advisors with the ability to have deeper conversations with their customers. That combination of economics, finance and psychology allows planners to not only have the authority to make recommendations that are in the client’s best interests, but explain why that decision is being made at a deeper level.

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