Most financial advisors seeking to cultivate long-lasting relationships with their clients are incorporating the principles of behavioral finance into their practices, relying on a growing number of tools to help them guide their clients over the common pitfalls of human behavior that can deter them from successful financial planning.
However, advisors who want to make their client relationships more meaningful would be better served by understanding their clients’ behavior on an individual level. This is not an easy task, says Blake Allison, CEO and president of Washington, D.C.-based Financial Education and Literacy Advisers (FELA), because even if all individuals share certain common behavioral traits, each one of us behaves very differently.
It’s nevertheless important for advisors who want to make a real difference in their clients’ financial future to gain a deeper insight into the individual behaviors that influence their attitudes toward financial planning, Allison says, in order to relate to individual clients and help them achieve better financial outcomes.
Allison, who set up FELA in 2005, believes it’s important for advisors to be keyed in to their clients’ understanding of their own behavioral patterns and the influences on those behaviors. Financial literacy and education is important at the individual level, he says, but if advisors are privy to the financial education programs that their clients participate in, they’ll get a much deeper insight into who their clients are, how they think and, most importantly, what they know and don’t know about personal finance and their own financial health. The more advisors know about how much or how little financial knowledge their clients have and the behavioral traits that influence them at the individual levels, the easier it will be for them to know exactly how to guide them.
“There is no question that advisors need to help their clients establish their financial goals, but getting people to those goals also requires looking at what they’re doing or not doing, and how that impacts their financial health,” Allison says. “Advisors who want to do a better job of serving their clients would benefit greatly by knowing what a client does or doesn’t do in order to figure out why they’re doing it or not doing it. Having that kind of information makes the financial planning conversation that much easier and much more intimate and immediate because it focuses on behaviors that can help address the underlying causes.”
FELA offers a number of financial education and literacy tools that individuals anywhere can use, most notably its signature LifeCents education and wellness program, which targets audience's personal financial and health goals, risks and needs to provide an achievable roadmap.
LifeCents can be implemented as a turnkey solution for financial advisors and financial firms that seek deeper client relationships, Allison says, and as individuals participate in the program, the data it reveals about their attitudes toward financial planning and their knowledge — or lack thereof — of personal finance can help greatly in fueling decision-making, driving client engagement and enhancing communications in order to improve both advisor-client relationships and financial planning outcomes. By establishing quantifiable risks based on consumers’ behaviors, and using that information to identify and mitigate financial risks and threats to financial security and solid financial health, advisors will be more attuned to their clients’ individual needs.
“From our perspective, we believe a critical step that is often missing from financial education efforts is to first raise awareness among individuals of their financial health and their relative position in key areas of their well-being,” Allison says. “People simply don’t know what they don’t know, so it is impossible to address the problems if they are not adequately diagnosed. Too often people are [told], for example, ‘You have terrible credit,’ and then they are told that they need to improve their score. However, if they don’t understand what credit is or if they don’t understand the implications of bad credit on other financial goals, how effective can this approach be? Furthermore, if they don’t understand the relationship between topics such as bad credit and saving for retirement, where is the relevance? Where is the motivation to change?”
Although most people would agree that they need to save more for their retirement, until they and their financial advisors understand why they are not saving and what the individual behavioral patterns that are leading them to not save more are, it is particularly difficult to engage the individual to help remedy the problem, Allison says.
“We want to be able to give financial advisors a deeper insight into the areas that threaten an individual’s financial security and the individual behaviors that are causing the problems,” Allison says. “We think of behavioral finance as preventative medicine, and our goal is to use financial literacy and education in as proactive a manner as possible.”
Check out 6 Behavioral Finance Principles Advisors Need to Know on ThinkAdvisor.