This is Your Brain on Finance

The sales clerk told Paul T. Klontz he paid his living expenses from one job and saved everything that he made from his second job.

After listening to how the clerk was saving diligently for his retirement, Klontz, who considers himself a financial psychologist, told the clerk, "You're an abnormal person."

Klontz was speaking clinically, of course, he told attendees to a breakout session during the Financial Planning Association's annual meeting in Nashville on Monday.

That's because after millions of years, humans developed the necessary habit of eating first and asking questions later. Saving was not wise and it certainly was not polite.

"You would be considered a hoarder," Klontz said. "You could be thrown out of the tribe for that."

The emerging science of behavioral finance or financial psychology was featured in many of the FPA's sessions. Klontz said a key reason is that technology over the past 12 years has allowed researchers to monitor brain function as a person is thinking and reacting.

Finance a Scary Topic

An important finding is that financial industry and advisors are doing it all wrong.

First of all, studies show that finance is the scariest topic people face. And the way many financial professionals approach consumers compounds the fear. More information makes things worse rather than better.

Because the brain acquired language late in development, most of it is devoted to images and sensations.

"The bottom two-thirds of your brain does not understand English," Klontz said in describing the part of the brain responsible for 90 percent of decisions. "It is sensory."

So, an environment that eases the senses is essential. Other sessions during the conference pointed to research showing that the waiting room is the most stressful point and place during a client's visit.

What the client sees, feels and hears in those moments is critical to the first impression as is the advisor's approach.

Does the advisor go out to the waiting room to greet people? When clients sit with the advisor, are they in a spot they get to choose? And is there an obstruction between the clients and advisor?

These are considerations that can make a difference in the success of the first meeting. This is why a car dealer is always very determined to get tire-kickers behind the wheel. That's the shortest distance to the dealer's desk.

For advisors to put clients at ease, Klontz suggested hiring an interior decorator to revamp an advisor's office to inject some feng shui. Klontz admitted that an interior decorator was a tad overwhelmed by his office when he hired one. But Klontz was impress that the decorator was able to use existing furnishings to set things at ease.

The stakes are more than pleasing esthetics. Americans are losing the battle with their primitive brain. Half of Americans over 55 have nothing saved for retirement, according to research that Klontz cited.

Half of the people who could not come up with $500 in emergency funding were highly educated, according to the survey. So, it was not a function of not knowing better.

It is a function of the neocortex, or the gray matter, being overwhelmed by the screaming child that takes up most of the space in a human skull.

To learn how to speak to that part of the brain, think and speak as a second-grade teacher would: Show, don't tell. This is why field trips are important.

Loss Threat a Powerful Motivator

Advisors won't necessarily be taking clients on field trips, although some do insist on visiting clients on their home turf to keep prospects at ease.

But Klontz suggests props. He uses them even in his talks with advisors -- stuffed animals and a brain model are within easy reach. Advisors can ask clients to bring an item from home that is important to them.

Another way to connect might sound a little cruel, but the threat of loss is twice as powerful as the promise of gain in affecting behavior.

An advisor can ask clients to close their eyes and imagine the future in the worst possible case scenario. They should imagine the last year of their lives, but add 10 more, because people usually underestimate their longevity.

Where are the clients? What is happening to them? Who is with them? Who is not with them that they wish could be?

These are uncomfortable questions, but the advisor can then ask the clients to open their eyes and tell them what they and the advisor can do now to avoid that future.

The practices might seem uncomfortable to advisors used to charts and numbers, but these techniques are critical to differentiating advisors and adding authentic value to clients, he said.

"They're buying you," Klontz said, "because everybody can offer what you are offering."

Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers, magazines and insurance periodicals. He was also vice president of communications for an insurance agents' association. Steve can be reached at [email protected].

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