The Practice Management Game of Behavioral Finance

Market volatility not only creates an environment rife with behavioral errors, it can also rob even the best financial advisors of productivity and limit their business potential.

After decades of working with financial advisors, I have found that during times of downside volatility, advisors typically report lower year over year production as new business slows to a crawl. The start of 2016 is no different.

In what could be an opportunity, a behavioral tendency called recency-bias kicks in and wreaks havoc on both productivity and investment performance as advisors and investors project forward the prevailing down market and throw existing processes out the window.

After the inevitable market rise, the resulting commiseration as to what they did not view as a buying opportunity is rationalized through another behavioral tendency called confirmation-bias, whereby the human psyche is soothed by putting more weight on the information that validates their paralysis and less on the information that did not.

Even some of the most seasoned financial advisors can get caught up in this behavioral trap and spend their time on reactive activities that stall their business growth and can lead to sub-par investor returns.


The best way to combat these behavioral tendencies engrained in all of us is to implement and follow processes to power through those mindsets. One of the biggest problems for financial advisors trying to build and grow their businesses in volatile markets is more of a symptom that I call “Tetris Syndrome.”  You may remember Tetris as a 1980s video game whereby various shapes drop down and the player has to deal with each one by spinning, matching and organizing each piece to create a solid line that disappears.

As the game progresses, the shapes continue to fall at a faster and faster rate as they stack higher and higher until the stack gets too high and the game ends when the player is inevitably overwhelmed. This can be analogous to a day in the life of many financial advisors as they spend more and more time in a reactive mode attempting to educate and calm the nerves of worried clients, while also analyzing the global markets trying to discern if it really is different this time.

These advisors spend little to no time proactively reaching out to clients for additional investments or to prospective clients whose current advisors are busy playing Tetris.

Sure, there are times when even the best clients may have moments of weakness and they need the experience and perspective of a great financial advisor. We also know that expertise does not come without considerable time spent on careful research and due diligence. However, growth and success in practice management and investing also requires an advisor to be proactive and disciplined to stay on track.

Building Blocks of Success