WM Market Reports

Wealth Advisors Increasingly Use Behavioral Finance To Win, Counsel Clients

Tom Burroughes Group Editor September 9, 2020


Recent sharp selloffs to equities have only underscored how volatile conditions have given the insights of behavioral finance new relevance. A study conducted by three organizations probes how advisors use these ideas to win business, retain clients and make their firms more resilient.

Wealth managers increasingly use behavioral finance insights to win and counsel clients, with recent market selloffs reinforcing the value of this intellectual toolbox, according to a new report.

A study of more than 300 advisors by Charles Schwab Investment Management, Cerulli Associates and the Investments & Wealth Institute, has found that 81 per cent of advisors now use behavioral finance techniques when talking to clients, rising from 71 per cent in 2019. 

The study, issued yesterday, found that advisors using this body of ideas say that it aids client retention and acquisition. Some 66 per cent of those questioned said that they gained clients in the first three months of this year – the time when COVID-19 struck. (Fieldwork for the BEFI Barometer 2020, as the study was called, was conducted in May and June this year.) 

Insights of behavioral finance, such as how people mistake portfolio gains for pure skill rather than also accept the role of chance, or treat losses more emotionally than they do with gains, and follow crowd behavior, have become more widely appreciated. The ideas draw on views about how humans have evolved from pre-history, and are used to explain events such as stock market booms and busts. 

As advisors compete for new clients and try to retain existing ones, new ideas can give an added edge.

The field is about “creating a choice architecture for people in advance”, Devin Ekberg, chief learning officer and managing officer of professional development at the Investments & Wealth Institute, said in a video conference about the report yesterday. This “choice architecture” term referred to how behavioral finance ideas can guide people on how to behave in advance of a market event – such as the March selloff in equities when the pandemic and lockdowns struck. “I’m excited to see people using that,” Ekberg said.

Ekberg said the discipline also reinforced the need for advisors to show clients that they are competent to handle investment issues, as well as to foster trust.

Big gyrations in markets, as seen in the March equity selloff, followed by the recovery, and now the tech-led selling of recent days, are reminders of how emotion as much as hard fact can drive developments. Panelists in the webinar yesterday said, when asked by Family Wealth Report, that an era of what are effectively zero interest rates have made people even more hungry for income wherever it can be found – and this can affect market valuations. 

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