Behavioral Finance: Implement Behavioral Finance in Your Client Interactions

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By Cheryl Harwell | Case Planning

Behavioral Finance: Implement Behavioral Finance in Your Client Interactions

While financial professionals can’t completely offset biases that they or their clients maintain, there are ways to reduce the potential negative impact that these biases may have on investment outcomes.

One maxim: Chasing the “hot dot” – great recent and past performance – expecting future results to continue recent market trends – is a poor strategy. This invites irrational decision-making and can cause one to buy and sell at the wrong times.

Create a plan with your clients and stick to it. Resist the temptation to constantly question the plan and switch from one strategy to another.

Take a systematic approach to help reduce the effect emotions have on investment decisions. Setting guidelines for managing the portfolio can help minimize making decisions based on emotion.

Implement a long-term view. Remind clients of their investment goals during periods of volatility, ensuring that they adhere to those goals. This can help reduce emotional reactions and avoid making poor investment decisions.

Keep your clients’ risk profiles and known biases in mind when developing their asset allocation. This will help ensure that they stay invested and focus on their long-term objectives. Accurately recognizing your clients’ risk profiles during the portfolio construction process will aid in preparing you to deal with other client biases as they become known.

Think about how the elements of a portfolio work together. Educate your clients – explain to them what tends to happen with different types of investments during up and down markets, so they won’t be surprised when it does happen. Surprises could crumble their confidence in their plan. This lack of confidence may lead clients to switch their strategy to one that may be detrimental to achieving their goals.

Separate your clients’ overall portfolio into different “buckets” allocated to different goals. By doing this, you can help your clients measure their progress toward each specific goal, such as retirement, college funding, vacations, home purchase, etc., which can reduce the chances that the client will overreact to a dramatic market move, then regret it later.

Lastly, be mindful of your own biases – the reactions to situations and events you are prone to experience. These affect your behavior with and recommendations to your clients. Take an objective personal inventory. When certain events occur, how do they generally affect you and your actions, attitudes, words, and tone? Work to improve your own reactions.

Integrating behavioral finance concepts into your client interactions can help you better manage client expectations, assist clients to prioritize their goals, improve investment decisions, and strengthen trust, ultimately deepening your client relationships and increasing client retention within your practice. All this can also lead to more and better client referrals.

Would you like to discuss these concepts? Send me an email at

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The SPS Family consists of two broker-dealers, Sigma Financial Corporation and Parkland Securities, LLC; a Registered Investment Advisory firm, Sigma Planning Corporation; and a back office, known as BD Ops, LLC. The companies, based in Ann Arbor, Michigan, are under common ownership and led by an experienced executive team. The SPS Family prides itself on personal service to independent registered representatives and investment adviser representatives from across the United States. We consider our representatives family as we strive every day to provide them “Independence. DELIVERED.”

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