Behavioural finance focus can put clients off

Speaking as part of XY Adviser’s Work from Home Tour on Tuesday, Buckingham Wealth Partners head of planning strategy Michael Kitces said most financial advice students weren’t “studying the right things” when it came to behavioural finance, which was often focused on economic theory rather than client psychology.

“We’re seeing the edge of formal education [in psychology] starting to show up in financial planning degree programs, with the caveat that it’s in the early days and I don’t think we’re studying the right things yet,” he said. 

“In the adviser domain the primary way this has shown up is what we called behavioural finance, which if you look at it from a research perspective, the body of knowledge is a series of studies about all the ways humans failed to act in the way economists predicted they would act. 

“If you say to a client, ‘Due to my extensive research and expertise, I’ve determined the reason you’re holding too much of your employer’s company’s stock is because you are exhibiting both familiarity and overconfidence bias,’ all you’re doing is accurately identifying a phenomenon and your client thinks you’re a pompous bastard.

Mr Kitces said advice education programs should focus more on how to influence client behaviour in a positive way and where poor behaviour towards money stemmed from, which would allow advisers to be more useful to their clients in helping them change their habits.

“The main piece is how do you help people overcome biases, make better decisions, navigate that path – behavioural finance gives you nothing for that, nor is it built to because it’s built by economists trying to identify investment anomalies,” he said. 

“What we see in the US is the emergence of things like a financial therapist designation, and a growing body of knowledge about what financial therapy is about coming from people who historically did marriages and family counselling, because the number one cause of marital strife is financial issues. 

“So marriage counsellors have got pulled into the financial realm, while advisers are saying ‘we know all this finance stuff but we can’t get our clients to change their behaviours’.”

Mr Kitces said academics such as Robert Cialdini and Richard Thaler, who focused on the psychology of influence and altering behaviour, were good resources for advisers seeking to make more effective use of behavioural economics.