More and more financial advisors today are on the lookout for practical ways in which to apply the principles of behavioral finance into their practices, but coming up with options that are easy to implement is not that simple.
“The demand for solutions is almost unmanageable,” says UCLA professor Shlomo Benartzi, an expert in behavioral finance and chief behavioral economist of the Allianz Global Investors’ Center for Behavioral Finance. “In responding to the needs of our clients, our main problem is prioritizing and deciding what we should address first.”
Since it was launched in 2010, Allianz’s Center for Behavioral Finance has engaged in many discussions with financial advisors in order to get a sense of the problems that advisors are facing vis-à-vis their clients in the post financial crisis era, and what sorts of tools or solutions would help them address these problems and better serve their clients. Recently, the Center released a white paper that Benartzi says is “Step One” in what will be a long process designed to help advisors incorporate behavioral finance theories and techniques in their practices.
The paper, entitled “Behavioral Finance in Action,” focuses on emotion and intuition, both of which play a key role in peoples’ decision making processes, particularly after the financial crisis, Benartzi says. The white paper offers academic insights that financial advisors can use tohelp their clients discriminate between wise intuitions, which can help them achieve better results in their financial planning, and the kinds of common, erroneous judgments that only serve to hold them back from their goals.
Understanding the impediments that investors face is the first step in coming up with solutions, and the paper identified four of these that impact the advisor/client relationship: Investor paralysis (the psychological fallout from the financial crisis has caused investors to leave record amounts of cash on the sidelines); lack of investor discipline (most investors often buy high and sell low); a crisis of trust (the recent financial crisis has had a lasting impact on the bond of trust between financial advisors and their clients) and the disinclination to save (inadequate savings is a chronic problem, not just for retirement, but for other contingencies as well).
All these challenges, Benartzi says, are products of the intuitive mind and can be addressed in simple and applicable ways that an advisor can easily follow. These solutions – which form a part of The Center’s Behavioral Toolbox — also engage the rational mind, which can counteract the more impulsive and sometimes irrational decisions that the intuitive mind makes.