Financial advisors often find themselves at the intersection of money and emotion. And as such, they tend to have a front-row seat for what happens when feelings and biases drive investing decisions.

“Financial health includes economics and emotion,” said Sarah Newcomb, a behavioral economist with Morningstar. “You cannot divorce one from the other.”

But when it comes to managing those who shoot from the hip, advisors would do well to turn to science. At the Morningstar Investment Conference in Chicago, Newcomb and her colleagues explained that behavioral economics — the study of how people truly behave around money, as opposed to how economists say a rational person ought to behave — can be the key to thwarting the emotions that stand in the way of smart financial decisions.

Here are a few tips consolidated from several sessions on the topic:

1. Ask Better Questions. Have Your Client Write Down Their Answers.

“‘How far away does the future feel for you?’, ‘What does wealth feel like?’, ‘What matters to you?’ They may seem like simple questions, but ask your clients and the range of answers will surprise you,” said Steve Wendel, a behavioral economist with Morningstar.

Taking a more holistic approach to helping clients understand how their short-term behavior affects long-term goals is essential. The more you know about your clients – and the more they know about themselves – the easier it can be to keep them on track.

“People don’t invest just to make money, they invest to be able to do something. Advisors need to know what that is. And have clients write it down,” Wendel said. “When they get off track, you can bring them back to why they are doing this in the first place. And you can show them in their own words.”

2. Add Friction to the Decision-Making Process.

From the outset, create rules designed to slow down emotional decision-making. For example, you can make a rule that your client is only allowed to make a change to his plan after he’s given you three days’ notice. Or they can only make a change if their spouse is present.

“It gives people time to take a break, and it depersonalizes the process,” Wendel said. “Designing processes like this makes it real to them and gives them time to separate emotion from facts.”


"People don't invest just to make money, they invest to be able to do something. Advisors need to know what that is."

3. Make the Future More Real.

For many people, the connection of their present actions to future consequences is just too abstract for them to consider unless given a prompt. Studies have shown that techniques like showing clients an aged picture of themselves gives their future more meaning, Newcomb said.

A bone-dry budget on a spreadsheet won’t do the trick. Advisors should review their clients’ needs and strategies consistently to make budgeting feel less like a diet and more like a road map to where they want to be.

“The more real you can make the future feel, the more it connects for the client,” she said.

4. Reframe the Story.

Advisors can alter the prevailing story by changing their vocabulary and knowing how to interpret events for their clients. Examples include illustrating income streams instead of large lump sums of money, or pointing out that down markets are “an opportunity to profit.”

“Would you rather buy something that’s 85% fat-free or 15% fat?” asked Samantha Lamas, a behavioral economist at Morningstar. “It’s the same thing, but it feels different. The same applies to personal finance,” she said.

The story matters, Newcomb said. “When people are panicking, the facts can be harder to grasp. The interpretation is important. And advisors can help frame that.”

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