Unlock the Power of Behavioral Finance in Financial Planning

Shorten Client Meetings

A study shows that overly lengthy client meetings can hinder decision-making. Just like a criminal parole board is more likely to grant parole in the morning due to mental freshness, clients may become mentally drained after a 1½-hour meeting with a financial adviser. In behavioral finance terms, they tend to revert to impulsive "system 1" thinking instead of slow and rational "system 2" thinking. This implies that advisers should be cautious about the duration of meetings to avoid clients being too tired to make decisions.

For example, if a meeting lasts too long, clients might feel like their brain is exhausted and be less likely to make a decision at that moment. Advisers need to be aware of this and adjust the meeting length accordingly to ensure better client decision-making.

Focus Client Decisions

Advisers should be careful not to overwhelm clients with too many decisions simultaneously. Overloading clients can impede their decision-making process. Instead, it is recommended to focus on achieving one or two goals at a time after a broader discussion.

Another useful technique is to have clients write down their priorities and set a written deadline. This helps them feel socially obligated to follow through on their commitments and complete the tasks. By doing so, clients are more likely to make decisions and take action.

Understand the Effects of Fee Structures

"Choice architecture" examines how the framing of choices influences people's decisions. The difference between opting in and opting out is significant and has implications for financial planners' fee structures.

In one medical study, most people don't have the mental bandwidth to make a consequential decision when filling out forms about organ donation. Similarly, in financial planning, clients may default to certain fee structures if they don't actively choose otherwise. Financial planners should be aware of this natural tendency towards inertia and design fee structures that encourage clients to make active choices.

For instance, in some fee models, clients keep paying unless they opt out, while with hourly billing, they need to make a fresh opt-in decision each time. Advisers should consider these behavioral differences to better serve their clients.

Humanize Online Interactions

A study shows that radiologists perform better when a photo of the patient is attached to an X-ray, as it humanizes the virtual patient. Taking a cue from this, Kitces' former firm started asking clients for permission to take a headshot and put it in the CRM record.

Also, posting one-to-two-minute videos of advisers introducing themselves led to an increase in website-driven inquiries from potential clients. The videos humanized the advisers and helped clients bond with them. This shows the importance of personalizing online interactions to enhance client relationships.

In conclusion, behavioral science is a powerful tool for financial planners. By applying these insights, they can work more effectively with clients and operate their practices better. As Michael E. Kitces stressed, "Please use 'The Force' for good and not for evil."

Michael E. Kitces discussed these and other ideas in his ENGAGE presentation "Applying Behavioral Finance in Your Financial Planning Practice." A video recording of it is available to those who bought an all-access pass to AICPA & CIMA ENGAGE 2024.

For more practice tips, listen to the AICPA PFP Section podcast episode "Digging Deeper With Your Clients, Part 1 of 3."