Journal of Financial Planning: November 2016
by Charles Hamowy CFP®, CPA/PFS; and Christopher Conigliaro, CFP®
As financial advisers, helping clients make good financial decisions is important to us. However, over time, we have observed that both emotions and engrained misconceptions get in the way of clients’ abilities to make sound financial decisions.
Many clients became overwhelmed when faced with decisions regarding their investments, family security, or taxes. And sometimes, they avoided making a decision altogether, which put them at risk. As a result, we started studying neuroeconomics—the combination of economics, neuroscience, and psychology—and its impact on how clients make economic decisions. Although we are not scientists, we felt there was a better approach to help clients make the right financial decisions, at the right time. At the end of the day, we want clients to follow our advice, have a secure financial future, and invest their money wisely.
Research indicates the same areas of the brain that generate emotional states also process information about risk, rewards, and punishments. This suggests emotions are key at influencing how clients make financial decisions. And this means that advisers need to provide a service and advice approach that takes into consideration the nooks and crannies of our clients’ minds to be able to guide them in making sound financial decisions.
In order for the client to make a good decision, a direct connection between the financial information being presented and the area in a client’s brain that can make the most sense of that concept is needed. At the same time, an adviser’s challenge is designing processes to systematically deliver the right information at the right time, aligning the practice workflow and setting reliable client expectations. Finally, the adviser must ensure everything comes together at that perfect moment when a client needs to make the right decision.
Left or Right?
Since 1861, because of the work of French physician Pierre Paul Brosca, we have known that the left side of the brain and the right side of the brain govern different functions. Some say genius is the brain’s capacity to merge the two hemispheres. Some speculate that Einstein may have had a more effective right brain than most. However, Einstein said himself that the greatest scientists are also artists.
The left side of the brain drives logic, analytic thought, language, science, math, and reasoning. The right side drives creativity, art awareness, imagination, intuition, music, and insight. The prefrontal cortex of the brain, which transverses both the left and right hemispheres, is where decision-making takes place. To design an effective and premium client experience, both hemispheres need to be stimulated.
Emotions are generated in the brain’s limbic system. Within the limbic system, near the hippocampus, is a pair of almond-shaped structures called the amygdala. The amygdala takes in sensory signals and generates emotions like fear, aggression, and anguish. Think about that—fear, aggression, and anguish are emotions that clients need help managing in order to make solid financial decisions. Therefore, it is important to be aware of the influence of emotions generated by the amygdala.
Knowing how the brain works allows for creating agendas that are unique to client needs, proactive, and repeatable. At the same time, an adviser’s client service approach needs to be efficient with systematic processes. When a discussion is about numbers, the focus is on the left side of the brain. When the conversation is about the client’s dreams, goals, and future, the focus is on the right side of the brain. It is also important to break the conversations up to allow clients to make one set of decisions at a time.
Building Good Habits
Most financial advisers have experienced how past economic cycles and outcomes of past choices have emotionally affected clients, thus influencing how they go about making financial decisions. Therefore, advisers must deliver a premium client service experience to build good and beneficial habits—both for clients and for the way their practice is run.
For something to be a habit, it needs to be consistent. The brain reads habits as predictable courses of action, and it eventually builds new bridges to anticipate habits. The process is called brain plasticity and over time it seeks to make things easier. Designing a repeatable, proactive, and consistent client service approach is key, and only has impact when the client internalizes what is happening. If not, the plasticity does not occur. As plasticity builds, clients become more comfortable with receiving advice and implementing recommendations, assuming that it is well communicated and done consistently. In other words, it is important to tell clients over and over what is happening and what to expect.
Fear and Greed Get in the Way
No one can challenge that we live in an age of super connectivity. The speed of the images and opinions clients receive make it possible for them to react based on instincts and preconceived notions. Eventually, instincts prevail over facts. Twenty-four-hour news commentary, “gotcha” journalism, and blogs share endless opinions and facts that may not be relevant and often get in the way of clients making good decisions. The challenge is that our brain reacts based on what it thinks is coming and once it has a belief—even if the belief is based on faulty information—it is very hard to turn it around. If clients have preconceived notions, extra effort is needed to get them to think differently.
Now let’s add some chemistry. The brain also has dopaminergic neurons that have a large impact on a client’s thought process. Notice the root “dopamine,” which is exactly what you think: these neurons drive the chemistry involved in managing decisions driven by greed. Logic and rational thinking don’t stand a chance. So there are clients who may need protection from making horrible decisions driven by greed.
Also, clients sometimes react to the same situation with different emotions, making it hard to determine if they would make a decision based on greed or fear. Neuroeconomics tells us greed is stronger than fear, which means some clients may be more upset when the market is up because they expected higher returns.
Loss Aversion
One interesting aspect of human decision-making is a strong aversion to potential loss. For example, the fear of losing $100 is higher than the emotional reaction of gaining the same $100.
Most of the U.S. population is only one or two generations from the worst depression in our country’s history. Millions of families lost their savings as numerous banks collapsed in the early 1930s. Unable to make mortgage or rent payments, many were deprived of their homes or were evicted from their apartments. Both working-class and middle-class families were drastically affected by the Great Depression.
And more recently, the stock market crash of 2008 resulted in mass unemployment, loss of homes, and an inability to pay off record levels of debt. These gut-wrenching events have left an indelible scar on our money psyche. From an evolutionary point of view, our perceptions are still highly influenced by these events as they have shaped our feelings about money and risk. This fear of loss is so engrained that it re-emerges as an emotion when clients make decisions. To overcome this, it is important to build a repeatable, consistent client experience that can eventually overcome these types of preconceived emotions.
Neuro-Linguistic Programming
Neuro-linguistic programming encompasses the most influential dynamic components involved in producing social style theory based on the work of psychologist David Merrill. Merrill used factor analysis to identify two scales, assertiveness and responsiveness. His model identified four social styles:
Drivers. Control specialists with high assertiveness and low responsiveness.
What to do: Lean forward. Talk fast. Congratulate them on taking initiative.
Dialogue: “Our process is the best way to control uncertainty.”
What not to do: Avoid the charts and calculations.
Expressives. Social specialists with high assertiveness and high responsiveness.
What to do: Talk about enjoying life. Assure them that houses, great vacations, and cars are all possible.
Dialogue: “You are special and everyone should know it.”
What not to do: Focus on budgets and the need to be cautious with spending.
Amiables: Support specialists with low assertiveness and high responsiveness.
What to do: Talk about safety and avoiding unnecessary risks.
Dialogue: “Safety should be your No. 1 concern.”
What not to do: Focus on standard deviation and volatility.
Analyticals: Technical specialists with low assertiveness and low responsiveness.
What to do: Focus on the charts and the math.
Dialogue: “At this point in life you really can’t afford to make a mistake.”
What not to do: Expect them to trust you because you are a professional.
Being able to identify a client’s social style does not predict a client’s every action, but it does provide a basis for forming reasonable expectations about recurring behavior. Using this knowledge, advisers can customize their communications and approaches to make decision-making as easy as possible.
Aligning Services with How Clients Think
Delivering a consistent client experience is paramount. This reinforces what a client can expect and makes them comfortable. In addition, it enables clients to comfortably refer. It is important to set expectations for client meetings in advance, be relevant, come prepared, and make sure the client knows what to expect and which decisions will be addressed. Be efficient, yet open to emotions and concerns. To make decisions easier and more digestible for all social styles, consider breaking apart different types of decisions and addressing them in a seasonal approach.
Label the appointments with a descriptive title based on the purpose or objectives of the meeting. Match product solutions with the need they are to fulfill. Use summaries and not detailed analyses, unless the client asks for more detail. Lastly, build a recurring and natural coordination with the client’s other professionals.
A successful financial adviser knows that numbers are the means to the story. The story is about a person’s life and their ability to make financial decisions to make it a better, safer, and happier one.
Charles Hamowy, CFP®, CPA/PFS; and Christopher Conigliaro, CFP®, are co-founders of Seasons of Advice® Consulting, a financial services consulting and coaching firm. They are also authors of the book Financially SECURE Forever, The Seasons of Advice® Solution.