One thing that is certain in times of turbulent uncertainty is that the financial advisors who are able to calm anxious clients and pivot conversations to problem-solving are the ones who will keep their own practices on a steady course, said Barbara Kay, a relationship coach in Wheaton, Ill.
Kay, who spoke recently at Investments & Wealth Institute’s ACE Academy 2022 in Nashville, Tenn., said that advisors may soon find themselves in emotional conversations with clients as the country rides an economic rollercoaster with lowered returns predicted for the next decade.
“Americans have been exposed to cumulative stress for two years, and their stress reaction is on a hyper-trigger,” she said. “We see this with people getting on planes and acting insane. So don’t be surprised if your clients come in and where they used to be happy-go-lucky, calm and rational, they’re now stressed out, more than they ever were before.”
Kay said that two key systems of brain function are fast/intuitive, which operates with very little information and makes snap judgments, and slow/hard, which is where slower, methodical analysis takes place.
“Slow/hard is where you live every single day. This is where you want your clients to live every single day,” she said. “The challenge is we, as humans, like the fast/intuitive brain. So when it comes to behavioral finance, the sad part is most of us operate through the fast/intuitive system more than we’d like to admit.”
And when clients operate here, their decisions will come from their natural biases, which allow for quick judgments based on patterns without much information, she said.
There are 175 identified biases, ranging from the way humans edit and reinforce some memories after the fact to the way they try to avoid mistakes by avoiding decisions they think are irreversible, according to the Cognitive Bias Codex 2016.
Kay has distilled the 175 to three that she said she feels are particularly meaningful to financial advisors and their relationships with their clients: pain avoidance, appeal and accuracy.
With pain avoidance, clients will fear events or scenarios—even if they are highly unlikely—if the client finds them vividly traumatic, experienced also by others, strongly emotional or personally relevant (fear of flying because of a possible crash, for example).
With the appeal bias, clients will find something desirable if it’s easy to understand, seems reasonable, can be related in a good story, and bestows initial success. “Any one of these can create an irrational appeal,” Kay said. “You can see with the appeal biases how fraudsters take advantage of people.”