Behavioural finance is the study of how the behaviours and cognitive biases that are within us all lead to poor financial decision-making.
The reason this is such a fascinating subject is because advisers can use these theories to help clients make better decisions. Advice that results in increasing the clients’ financial wellbeing.
The events of the last few weeks will have given plenty of opportunity for this.
My question is this: are you equipped to be having these essential conversations? Do you feel equipped?
During lockdown you will likely have been talking to clients about why it’s not a good idea to sell out at the bottom of markets, and/or providing reassurance that their financial plan is still achievable.
The exams advisers need to pass in order to be regulated are almost entirely technical.
Yet as important as these are, the ability to construct a medium risk investment portfolio, or being an expert in defined benefit transfers, does not prepare you for talking to a client who's panicking because of stockmarket volatility, or displaying high levels of present bias.
In addition to the study of behavioural finance, therefore, advisers should also be trained to know what to do when they see those behaviours and cognitive biases in action.
It’s all about the client – and that’s not easy
Back in 2013 I achieved my diploma in business coaching from the European Mentoring and Coaching Council (trained by Jan Bowen-Nielsen of Quiver Management).
One of my major takeaways from two years of studying first for the certificate, then the diploma, was how hard it is to make a conversation entirely about someone else.
Try it. Next time you have a conversation with someone, see if you can avoid anything about yourself.
Don’t offer any suggestions or solutions, don’t mention yourself. You’ll find it’s actually very difficult to do.
When I practice as a coach, I need to spend a few moments before the session starts so that I go into the session with a “clear intention to listen and observe." This is a pretty good approach to when you're talking with clients.
In this way we can uphold the crucial principle that the client’s values are paramount. This can sometimes mean helping someone to do something you don't agree with.
So we can see that the alignment of client values with their actions is therefore key – creating an awareness in the client (and in the adviser) of what those values are.
In turn, this means spotting when the clients’ behaviours are actually working against their values.
Coaching with behavioural insight
Taking all this into account, in order to help clients, I believe advisers need skills in:
- Coaching (to help tease out values and objectives)
- Behavioural finances (to match clients' behaviours against their values)
- Technical knowledge
Of these, the first two are most likely to help clients get positive outcomes for their lives.
Have a look at your training and competence plan. What is the balance between the above?
Putting these skills together results in coaching with behavioural insight – helping clients to make the best decisions for them.
In this way advisers can perform a key role of being there for clients during these difficult times.
Focusing on their financial wellbeing, and what makes them happy, even understanding your client so well that you contact them at a time when you know they'll be particularly worried, all adds up to a considerably strengthened client/adviser relationship.