Behavioral finance is very much in vogue these days, and many advisors across the nation are looking to find out more about it and to apply its principles in their practice. Yet some believe that the financial world’s rush to embrace behavioral finance may be a little too much too soon, and could actually prove to be counterintuitive or futile for financial advisors.
Justin Reckers, director of financial planning at Pacific Wealth Management in San Diego, says that financial advisors really have to make an effort to understand what behavioral finance is. They need to understand how psychology interacts with economic theory, and they need to realize that the goal of proper applied behavioral finance is to create more educated and better-equipped investors who can recognize the mental roadblocks they may have, and how these may be inhibiting their overall goal of saving and proper financial planning. If advisors do not keep that very fundamental tenet in mind, Reckers believes they risk falling prey to misusing behavioral finance or using it in a limited fashion.
As behavioral finance has become a greater part of the mainstream financial forum, Reckers is most concerned that advisors may rely on financial products that are either being billed by the firms producing them as capable of dealing with particular investor biases or fears, or are a reflection – albeit unwitting – of what an advisor believes is the right fix for a particular fear or bias.
While financial institutions have been making use of behavioral finance for years, it is only recently that they have started to make it a part of the retail side of their business, Reckers says. There’s a danger in this if advisors and their clients concentrate on financial products that firms may produce as a consequence of implementing behavioral finance principles on their end, he says, since “proper behavioral finance needs to be used in client relationships in order to make people aware of their behavior.” Anything else, Reckers says, would be more of a quick-fix solution to a deep-set issue.
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“Rather than products, self-determination is the most important part of applied behavioral finance,” he says. “It is about building a decision-making process to get people to make their own decisions. As a financial advisor, my goal is to figure out where a client wants to go and what is driving their behavior. Specific products are not the answer.”