Rosalind Evans
Financial advisors recognize the importance of emotional aspects in money management in a world where financial technologies are advancing rapidly. While tools like robo-advisors can optimize investment portfolios automatically, they cannot understand and handle human emotions. Integrating behavioral science into financial advising is essential for achieving better client outcomes, blending the analytical with the emotional.
Harnessing Behavioral Science in Finance
Financial advisors increasingly turn to artificial intelligence to handle routine tasks such as research and scheduling, paving the way for a more focused approach to behavioral science. This field merges psychology and economics to explore why people make the financial decisions they do. “For too long as a profession, we have been taught to ignore emotions,” explains Tim Maurer, a certified financial planner and chief advisory officer at SignatureFD. Maurer advocates for a qualitative approach, focusing on the individual’s purpose behind their portfolio rather than just the numbers.
Emotional Intelligence in Investing
According to Maurer, the most effective investment strategy is not necessarily one that offers the highest return but that clients can consistently adhere to. This involves understanding the client’s emotional needs and guiding those emotions constructively. “We’re focusing our planning on our clients’ actual human felt needs, rather than the tools and techniques that we might utilize to help them achieve their goals,” Maurer noted during CNBC’s FA Summit session. This human-centric approach helps advisors maintain client engagement and trust, particularly during turbulent market periods.
Beyond AI: The Human Connection
Sam G. Huszczo, a CFP and founder of SGH Wealth Management, emphasizes that while AI can help explain financial strategies in various ways, it cannot replace the human connection necessary to communicate and empathize with clients effectively. “You can give great advice, and people won’t take it. So, creative problem-solving comes in being vulnerable and able to communicate in a way that will speak to them,” Huszczo says. This highlights the limitations of technology in addressing the nuanced emotional aspects of financial advising.
Differentiating Behavioral Science from Financial Therapy
While behavioral science can help advisors understand and influence clients’ emotions positively, it differs from financial therapy. Financial therapy delves deeper, often addressing entrenched behaviors that block financial goals. “Financial therapy is looking at a situation that is intractable, where somebody cannot get past a particular financial behavior,” Maurer clarifies. Financial therapists work to uncover the roots of these behaviors, providing a pathway to overcome them, as illustrated by Ashley Agnew, president of the Financial Therapy Association, in her work with clients struggling with decisions about family business transitions.
As financial advising evolves, the integration of behavioral science signifies a profound shift towards a more empathetic and practical approach to managing money. By addressing the emotional factors that influence financial decisions, advisors can better support their clients in achieving their financial objectives. This blend of technology and emotional insight sets a new standard for the future of financial advising, where understanding the heart and mind becomes as essential as understanding the numbers.
