Four reasons why Australian financial advisers need to know about behavioural finance

From

Simon Russell

Many financial advisers have some familiarity with behavioural finance – they’re aware that it refers to research related to the psychology of financial decision-making. They’re aware that clients can be prone making a range of ‘irrational’ decisions. However, fewer advisers are aware of how they can practically use this research to help both them and their clients. Yes it’s important; yes it’s interesting – but what can they do about it?

Why is this particularly important for Australian financial advisers right now?

1. Because it can make advisers’ lives easier

It’s easier to influence clients when you align your engagement with the way clients naturally think. Behavioural finance can be likened to the ‘gentle art’ of judo – deftly navigating the hidden forces of clients’ decisions and actions, rather than the tougher job of trying to box against them. If a client doesn’t follow their adviser’s advice despite having had it explained to them three times then their adviser is probably doing more boxing than judo.

2. Because it can lead to better and more compliant advice

Behavioural finance can help to avoid misunderstandings and miscommunications between advisers and their clients. Asking clients whether they understand advice doesn’t help if the client doesn’t really know if they understand, for example. And it can help identify advisers’ own biases and blind-spots when giving advice. Research shows that while advisers are more financially sophisticated than their clients, none of us is immune. As a result, behavioural finance can help advisers comply with both their legal and ethical obligations. It can help ensure that clients receive advice that is genuinely in their best interests.

3. Because it can lead to better commercial outcomes for advisers

Behavioural finance can help build trust, leading to greater client retention and referrals. It can create opportunities for new types of advice that focus more on managing clients’ behaviours. And to new types of clients, such as those who are too overconfident to believe they need advice. And it can help clients appreciate the value of the advice they receive. Research clearly demonstrates that it’s not enough for advisers to deliver high quality, valuable advice – it also needs to be perceived as such by clients.

4. Because advisers who don’t understand behavioural finance can’t be financial advisers

FASEA has identified behavioural finance as a key competency as part of the exam that all Australian advisers must pass. Not only that, it has indicated that behavioural finance is an area that advisers who failed the exam need to improve in order to pass. FASEA has also identified behavioural finance as a topic that many advisers need to study at university. Those advisers who are not aware of the research can feel lost when facing questions about human behaviour; people’s behaviour can seem entirely subjective and unpredictable. In contrast, those who are familiar with the behavioural research are more equipped to identify the systematic patterns in how people think and behave.

By Simon Russell, Director

Simon is a specialist in behavioural finance. He has been intimately involved in designing behavioural finance-related training, education and assessments for financial advisers on behalf of academic institutions, specialist financial adviser education providers, regulators and financial institutions.

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