AccuProfile®: Actionable Behavioral Finance

AccuProfile®:

Actionable Behavioral Finance

Advisors want to use behavioral finance to get to know clients before and deliver better personalized services. But how to make it natural and easy to use?

Why Is Behavioral Finance Important?

A widely cited Vanguard study quantifies an advisor’s value to be 300 basis points, out of which behavioral coaching contributes up to 200 basis points.

However, Morningstar research suggests that investors don’t want to be coached. This shouldn’t be a surprise. Just recall your own teenage years – did you want advice?

But clearly, investors, like teenagers, can be driven by emotions and make irrational decisions at times. Can we make behavioral finance palatable and enjoyable?

How to Make Behavioral Finance Easy to Use?

Just like how our DNA is composed of various genetic markers, behavioral finance can be dissected into numerous behavioral factors. These factors, akin to DNA markers, contribute to the intricate tapestry of human decision-making and financial behaviors.

Similar to genetic markers, each behavioral factor can be independently assessed, and then you can put them together for the big picture.

What Behavioral Factors Are Most Relevant?

Here are some of the most important behavioral factors that are directly relevant to wealth management:

  • Investor type: How do you respond to market ups and downs? Are you a passive investor, trend follower, or contrarian?
  • Behavioral biases: The most commonly known behavioral biases include loss aversion, overconfidence, herding, the confirmation bias, and the recency bias.
  • Financial IQ: How much does your client know about finance and investing?

Investor Type

Adapted from Dr. Andrew Lo’s research

How to Quantify Investor Behavioral Risk?

Just as investments have investment risk, investors have behavioral risk.

All behavioral factors can be rolled up into a Behavioral Risk Index, a number from 1-10 that indicates how likely an investor is subject to irrational responses. During market turmoil, advisors can prioritize clients with high behavioral risk who need the handholding the most.

“No Shame” – We Are All Human

Sometimes people hesitate to talk about behavioral biases because it feels judgmental. The good news is, it doesn’t have to be.

All of us have various behavioral biases to some extent. Having the awareness is important but we are all human and it is ok to have emotions that may not be perfectly rational.

Winner, 2021 & 2023, WealthManagement.com Industry Award in Risk Tolerance & Client Profiling

Use Behavioral Finance To Solve Real Problems

How to Deliver Personalized Advice?

During market turmoil, telling your clients not to panic may be the right advice for trend followers, but not for contrarians. Now you can tailor your advice for each client.

How to Talk About Cognitive Declines?

If you hesitate to bring up the topic of cognitive declines, we have visual cues to help you get started.

When the decline happens, another visual cue nudges you to put the protection in place, and when you do, positive confirmation will make you and your clients feel good about the steps you have taken.

How to Address Risky Investor Behavior?

Which clients do you prioritize during the market turmoil? Combine Behavior Risk Index with portfolio monitoring, you can quickly identify clients who need the hand holding the most.

We needed something that would help us systematically identify the investor types and behavioral biases for our clients and prospects.

Andes Wealth stood out as a unique way to not only help us better understand our clients and prospects, but also help our advisors better understand themselves so they could better relate to clients.

Jack Cowling, CFA, Portfolio Manager, Waterway Wealth Management

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