Behavioral finance: Taking a deeper dive with clients

Behavioral finance means helping clients deal with the neuroscience behind their decision making, and how that decision making can lead to fatigue.

Pamela J. Sams is a behavioral financial advisor and owner of Jackson Sams Wealth Strategies in Herndon, Va. She gave a presentation on how advisors can incorporate behavioral finance techniques in their work with clients during the 2023 Million Dollar Round Table annual convention.

Humans make tens of thousands of decisions every day, Sams said, and that lease to decision fatigue. To further understand the neuroscience behind decision making, she said, look to the amygdala, the almond-shaped gland in the human brain that keeps us safe.

“In prehistoric times, the amygdala kept us safe from saber-toothed tigers or wooly mammoths, but today that same amygdala prevents clients from investing sometimes because they want to flee to safety. That same dynamic is going on with the fight-or-flight reflex from clients – as if they were being attacked by a saber-toothed tiger when the invest in the stock market.”

Sams told a story about a client whose portfolio was heavily invested in a particular stock. “I told her she needed to divest some of that because she was over-weighted in it. But she did not take my advice and ended up losing 60% of her portfolio when the stock went down. She fell victim to confirmation bias, which is when people believe that if something is going to hold true now, it probably will continue to hold true.”

Anchoring is another bias that sometimes hits clients, Sams said. In that scenario, a client will see a high balance on their account statement. “But then things go awry with the stock market and their balance goes down. But that high balance was their watermark, even though they’re still on track for their long-term goals. They don’t like to see that.”

Herding is another way of saying “everybody’s doing it,” Sams said. “That’s when clients say, ‘If everyone I know has this particular thing in their portfolio, then why shouldn’t I have it too?’ But a personal financial plan is personal for that particular client – it’s not for everybody. Everybody should not have the same things in their portfolio.”

Loss aversion bias affects clients when they are more afraid of losing money than they are of potential gains, she said. “This was especially true in 2008-09 when everyone just wanted to stop the bleeding,” she said.

Behavioral finance: What’s your money story?

A behavioral financial advisor will have a conversation about the client’s money story, Sams said.

“I tell my clients the story of the way I grew up with money and ask them to share how they grew up with money. What were your parents like with money? Did you get an allowance? What did you do with your first paycheck? We develop our money habits by the time we’re six, seven years old. But we often don’t realize we’re operating from our six- or seven-year-old self when it comes to handling our finances.”

Sams said her client discussions include a conversation about their values in addition to their money story.

“I understand if clients get emotional about their money,” she said. “I work with a lot of women who are in transition – divorced and widowed women – and I see money holds a lot of emotion with them.”

Sams said clients want to know that you care about them as well as their money.

“You must be able to understand and give advice, not just looking at products and plugging them into a plan. You have to really understand and match your advice to your client’s values and goals.”

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.

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