How Behavioral Finance Can Help Clients and Advisors

Financial advisors are increasing their use of behavioral finance techniques when dealing with clients and reaping the rewards.

According to the second edition of an annual survey from Charles Schwab Investment Management (CSIM) and the Investments & Wealth Institute, conducted by Cerulli Associates, 81% of over 300 advisors said they’re using behavioral  finance techniques in client communications and interactions, compared to 71% a year ago.

Sixty-two percent used such techniques for portfolio construction, up from 58% a year ago. 

Of those using behavioral finance, the majority — 62% — reported adding new clients, double the level of advisors who didn’t use such techniques. About  two-thirds of new clients for both advisors groups said they’d become dissatisfied with their previous advisors or wanted to consolidate their accounts.

The Cerulli survey was conducted in May and June after the stock market had begun its steep recovery from the pummeling it took in the first quarter. It relied on self-reporting from advisors, who were roughly evenly split among those working with wirehouse firms, RIAs and national or regional broker-dealers.

The big increase in advisors’ use of behavioral finance in client communications reflects their intensified efforts to help clients deal with the increased market uncertainty and life overall in this pandemic year, according to the Cerulli report on the survey results.

Benefits of Behavioral Finance

Advisors using behavioral finance techniques were better prepared for this year’s extreme market volatility, said Omar Aguilar, chief investment office of passive equities and multi-asset strategies at CSIM.