Despite the countless articles, research studies, and books published on behavioral finance and its impact on financial advice, very few writings provide actionable insights for how to incorporate these concepts into client relationships or the fundamentals of investing. We identified three reasons why in a previous post.
Most of the content published on this topic explains what behavioral finance is, its significance, and the definitions of various biases that plague investors.
As a result, advisors are left with interesting anecdotes or pop-psychology musings when what is really needed is a multi-step solution of coaching, investment selection, and repeated communication to fully address the ingrained instincts that drive “irrational” investor behavior.
Content continues below advertisement
Here are four steps advisors can take right now to implement behavioral finance concepts.
1. Make behavioral coaching the center of your client relationship philosophy.
We believe by readjusting your value proposition around behavioral coaching you can make it the core of your advisory practice, effectively differentiating you as an advisor. By centering your practice around behavioral coaching, you can base your client conversations on behavioral lessons and applications more holistically while building and strengthening trust. This will keep the importance of behavioral coaching top of mind for investors, instead of reducing it to an after-thought when the market misbehaves.
Adjust your website to reflect the behavioral coaching as your core value to clients and why.
Focus client conversations around goals, long-term returns, and behavioral bias education.
Emphasize how behavioral coaching helps them be better investors through daily social media engagement, monthly email newsletters, and regular seminars.
2. Construct portfolios with investment solutions that seek to provide a calmer investment experience.
Due to behavioral biases, many investors have a difficult time sticking to a simple broadly diversified portfolio. Investors tend to chase markets, compare with peers, buy high and sell low, give up on stocks at exactly the wrong time, and so on. Improving the quality of the investment experience should be the goal of every financial advisor.
Select money managers that seek to do one or all of the above
3. Emphasize long-term, goals-based investing with aligned performance metrics.
The industry depends on short-term trailing returns that focus on gains—this continuously reinforces the demand for gains and encourages the preoccupation with short-term performance. Instead, there are other metrics that can provide a more goals-based approach to measuring risk, returns, and the trade-off between the two.
Metrics and tools that evaluate the risk, measure long-term consistency, and seek to provide better understanding of the long-term investment journey are necessary for changing the way you and your clients view and discuss investments.
4. Explain to clients what’s worth worrying about and what’s not.
Combating the daily deluge of investment and economic news can be difficult. Communicating to clients what’s worth paying attention to and what’s better left behind can help strengthen trust.
For clients that are easily swayed by these updates, regular communication and reminders of your systematic approach to investing and the purpose of their goals-based plan should alleviate in-the-moment concerns.
Investors seek out advisors because they want the expertise and someone to help manage their emotions when it comes to money management. With the rise of robo-advisors, the human factor will be more important than ever. Redefining the value proposition beyond a provider of financial advice to include behavioral coaching elevates advisors, reminds investors why they want an advisor in the first place, and helps align their practice with the fiduciary standard. Effecting fundamental changes to portfolio construction and investment products that address behavioral challenges is paramount for the long-term success of any financial plan.
The media isn’t helping. The industry isn’t helping. Human nature isn’t helping. In the face of these challenges, it’s not enough to merely educate. Coaching needs to be an integral part of your advisory business from the start of the client relationship and carried throughout your communications and demonstrated in portfolio construction.
Better portfolio construction and consistent behavioral coaching that seek to minimize the biased investor mindset are essential for successfully incorporating the behavioral finance concepts into your practice.
Important Notes and Disclosures:
Swan Global Investments, LLC is a SEC registered Investment Advisor that specializes in managing money using the proprietary Defined Risk Strategy (“DRS”). SEC registration does not denote any special training or qualification conferred by the SEC. Swan offers and manages the DRS for investors including individuals, institutions and other investment advisor firms. Any historical numbers, awards and recognitions presented are based on the performance of a (GIPS®) composite, Swan’s DRS Select Composite, which includes non-qualified discretionary accounts invested in since inception, July 1997, and are net of fees and expenses. Swan claims compliance with the Global Investment Performance Standards (GIPS®).
All Swan products utilize the Defined Risk Strategy (“DRS”), but may vary by asset class, regulatory offering type, etc. Accordingly, all Swan DRS product offerings will have different performance results due to offering differences and comparing results among the Swan products and composites may be of limited use. All data used herein; including the statistical information, verification and performance reports are available upon request. The S&P 500 Index is a market cap weighted index of 500 widely held stocks often used as a proxy for the overall U.S. equity market. Indexes are unmanaged and have no fees or expenses. An investment cannot be made directly in an index. Swan’s investments may consist of securities which vary significantly from those in the benchmark indexes listed above and performance calculation methods may not be entirely comparable. Accordingly, comparing results shown to those of such indexes may be of limited use. The adviser’s dependence on its DRS process and judgments about the attractiveness, value and potential appreciation of particular ETFs and options in which the adviser invests or writes may prove to be incorrect and may not produce the desired results. There is no guarantee any investment or the DRS will meet its objectives. All investments involve the risk of potential investment losses as well as the potential for investment gains. Prior performance is not a guarantee of future results and there can be no assurance, and investors should not assume, that future performance will be comparable to past performance. All investment strategies have the potential for profit or loss. Further information is available upon request by contacting the company directly at 970-382-8901 or swan-stg.statik.press. 466-SGI-121719