Behavioral finance is providing new insights into client behavior and how people generally make financial decisions. Some of the most popular tenets of this rapidly developing field are reshaping the standard assumptions of next-generation advisers.
Many advisers are now willing to accept that emotion is a critical part of retirement planning and financial decision-making is not simply an irrational feeling to be removed from discussions. Likewise, aversion to loss is not an indicator of a client’s low tolerance for risk alone, but a common bias that most people have when confronted with the possibility of losing something of value. What behavioral finance researchers have learned through years of experiments, many veteran advisers have learned through experience. That is, how alternatives are framed, or presented, greatly influences how a person will view choices. And if those choices are ambiguous, most people will default to the familiar, choosing the option that is well-known. While the collision of traditional economics and finance with social and cognitive psychology – the basis of behavioral finance – is successfully introducing novel ways to engage clients, the focus continues to be on the actual decision rather than the entire decision process. It is not that the current applied focus of behavioral finance is incorrect as much as it is incomplete. Consider three dimensions of a client’s pre-decision phase that greatly influences successful adviser engagement and financial outcomes.
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