Behavioral Finance

Changing Corporate Cultural, a Behaviorally Smart Guide

Your Dream Investment

Many people invest heavily in self-help courses, books, and conferences but in what, exactly, are they investing? How many of us have a deep understanding of how we tick based on our natural talents, passions, mission, values and purpose?

It occurs to me that a good starting point before heavily investing in self-help stuff – is to know the core of who you are. Where are the behavioral strengths that need focus, and the struggles which need managing? What is your life vision and how well prepared and gifted are you to deliver it?

From a very early age, I knew who I wanted to be and what I wanted to do. I watched people around me behaving badly towards each other in the workplace and in some cases ridiculing others for the dreams and visions they had for their lives. Determined to correct this dysfunctional behavior set in and my passion for building others up and pointing them in the right direction became my life’s work as a mentor and a people culture trainer.

For years I invested in the self-help market to train myself on how to understand others and be their mentor. How to understand the reasons people communicate inappropriately with each other and to find ways in which, through self-help, I could be the answer to some of the challenges I was seeing around me in the workplace.

My personal tipping point (source: Malcolm Gladwell) came on the day I completed the DNA Behavior Natural Behavior Discovery process. I realized that I was investing in all the wrong areas of my inherent personality. I needed to activate the skills and talents (strengths) I had, and build on those without over doing mending the struggle areas, but without the insight, I gained from completing the DNA Natural Behavior Discovery, I wouldn’t have been able to refocus on my career and achieve the success I now have.

So – what did I discover?


Your dream investment


I discovered I have the following strengths for mentoring and training others:

1. Very creative – not in the arts as most would understand – but in wordsmithing and in providing out of the box thinking to help others solve a problem.
2. Capable of giving frank feedback when people are off track and need clarity in being guided to the right path
3. Quite reserved in nature which helps me listen to others as a priority before giving my feedback. This slowness to express emotions or opinion means I am more suited to one-on-one meetings and training small groups rather than continually facilitating and presenting to large groups.
4. Somewhat of a generalist so that I keep the feedback at a high level rather than bogging people down with the specifics before they are ready.
5. Enjoy working as part of a team rather than being left on my own island. Having others to collaborate with regularly is much better for me than working independently.

These insights put me on a sound footing to understand where I needed support, training, coaching and mentoring to deliver the vision I had for my own life.

Very quickly I realized the foolishness of investing in self-help that is unfocused and serves no useful purpose in using behavioral strengths, building confidence, or keeping anyone on track to deliver their life vision.

Having completed the DNA Behavior Natural Discovery process, I was able to target specific areas of self-development; but more than that it also revealed to me the most effective approach to mentoring and training others.

So the moral of this story – invest in revealing your personality; then identify the gaps that need managing. Not only will this save significant $$$ regarding self-help and education, but it will also ensure the $ you spend produces a good or even great return on investment throughout your life.

You will see results in your life, deliver on your vision, and above all, stay with your Plan A – not even tempted to have a Plan B or even C.

To learn more, please speak with one of our DNA Behavior Specialists (LiveChat), email, or visit

dna behavior People-Insights

Behavioralizing Advisors & Financial Planning

“Identifying each person’s financial personality regarding how that drives decision making, will reduce costly complaints.” Leon Morales, DNA Behavior International

[The Institute for Innovation Development interview series invites innovation experts, innovative business leaders and emerging FinTech companies to talk to our readers about their latest innovation activities. The series seeks to learn from innovative business creators, uncover innovation best practices, and apply these insights into a financial services business model.

We recently sat down with Leon Morales, Chief Relationship Officer of DNA Behavior International, a robust technology platform designed for financial advisors which delivers practical and scalable behavioral intelligence solutions to Know, Engage and Grow their relationships with their clients and prospects.]

Hortz: In today’s environment, advisors need to go much deeper in applying the know your customer rule and in client engagement. How does DNA Behavior help advisors do that?

Morales: Per our research, every person inherently has, what we call, a unique Financial DNA code representing their financial personality. A person’s natural born DNA behavioral style shapes their financial personality -including risk taking – by their current environment, life experiences, values, and education. Their natural DNA Behavioral style remains stable over time and will drive how a person consistently responds to different events, thereby always influencing life and financial decision making. We have developed the tools necessary for advisors to help determine and manage their client’s behavioral styles. It’s also important to point out that research shows that 93.6% of the financial planning process is the behavioral management of clients. [Research cited: Meir Statman, University of Santa Clara, California The 93.6% Question of Financial Advisors, Journal of Investing, Spring 2000]. Additionally, our compliance management program helps firms achieve a 99.75% level of suitability between the client’s goals, risk profile and the solutions offered. Currently, advisors are only 40% accurate in identifying their client’s risk profile. Our starting point is with a person’s natural instinctive behavior because that is where they are going to revert to when they are under pressure. Significantly, this approach reduces costly complaints placing advisors and firms in years of litigation.

Hortz: Does your FinTech platform help advisors address the DOLs fiduciary ruling?

Morales: Yes. The DOL definition of being a fiduciary demands that advisors act in the best interests of their clients, and to put their clients’ interests above their own. The Financial DNA Discovery Process is the next generation of behavioral discovery capturing all dimensions of a client’s financial personality by utilizing the most academically sound psychometric systems. We strongly advocate this approach because it provides a more accurate measurement of who the client is and therefore the best starting point for any discussions about important life and financial decisions, and longer term education and development. Further, the Financial DNA reporting system provides insights on how best to communicate, framing relevant information on the client’s terms. These insights increase the client’s chances of understanding the advice or recommendations and can reduce the impact of behavioral biases triggering irrational decision-making by both the client and the advisor.

Hortz: Talk about the power of questions! The 46 questions in your Financial DNA Natural Behavior questionnaire are fine-tuned enough to uncover such deep behavioral insights into your clients! What have you determined as the accuracy of the tool

Morales: The Financial DNA Discovery System was independently validated to have a 91% reliability rating by Professors of Industrial Psychology at Georgia Tech University and among many independent psychometric and business consultants each with 10+ years of related business and financial services industry experience.

Hortz: Can you share with us further about other key research which forms the base of your methodology and allows you to characterize it as the world’s most reliable process to reveal and engage clients?

Morales: Our proprietary Financial DNA Discovery Process has been developed and independently validated since 2001 by a highly qualified team with over 100 years of combined academic and practical behavioral discovery instrument development experience. Furthermore, DNA Behavior International has invested more than 60 years in the design of these systems and its programs. To ensure a reliable prediction of behavior, the Forced Choice Scoring Model is the basis for Financial DNA Natural Behavior Discovery which is the first step in discovering the complete financial personality. It solves for dangerous voids in traditional risk profiling. Our view is that most of the traditional risk profiles use situational based questions, that is, the client could respond to the questions differently depending on any one (or combination of) market or personal events, attitudes, feelings, perceptions or education. Our methodologies go deeper into a more instinctive, automatic, hard-wired Level 1 decision-making behavior. Daniel Kahneman the psychologist known for his extensive work in behavioral finance and decision making, details this “Level 1″ automatic decision-making area in our brains as, when we are under pressure, where our “hard-wired” instincts will drive decision-making. So unless a clients Level 1 behavioral style is known, it is impossible to build a long-term portfolio, as it will be emotionally incompatible. So the questionnaire has to be designed to uncover this Level 1 behavior – free from personal or situational bias. The Financial DNA Discovery provides this Know Your Customer insight, and the validated results are accurate and constant over time. It’s also important to understand that risk tolerance is only one dimension of a client’s financial personality, and in fact, there are multiple elements of an investor’s overall “risk profile.” There are several other behavioral finance factors necessary to fully understand the decision-making biases of both the client and advisor. Not communicating these biases only creates more risk to the client/advisor relationship, decision-making, goal-setting and overall compliance. So, the risk discussion is not complete without knowing the client’s full set of behavioral biases and knowing how to communicate on the client’s terms.

Hortz: Besides having clients fill out the Financial DNA Natural Behavior questionnaire, you suggest that the advisor does so as well. What benefits does that provide the advisor?

Morales: When an advisor is aware of their own bias, they are better able to offer advice that is in the best interests of the investor, in a fiduciary fashion. This client first approach is an increasing concern to financial regulators. With both client and advisor completing and sharing the Natural behavior discovery, it closes the knowledge gap between advisor/client.

Hortz: Tell us about your Certified Wealth Mentor training and how it differs from other advisor training programs.

Morales: Our Certified Wealth Mentor training program prepares advisors to become more equipped to guide and behaviorally manage the client on through the integrated ups and downs of the life and wealth creation journey. It teaches them to know, engage and grow different clients enabling them to deliver customized lifelong financial planning experiences for sustainable Financial Planning Performance. The DNA Behavioral training methodology is proven to enhance advisors ability to more confidently advise, mentor and coach clients to make improved life, financial and investment decisions based on their purpose. Further, our highly structured and tangible Financial Planning Performance Planning Process provides the platform for enabling advisors to charge higher retainer based advisory fees and increase profitability on a sustainable basis.

Hortz: What advice would you give advisors in how best to work with clients in a fiduciary environment?

Morales: All human beings have a financial personality which includes emotions that can erupt both positively and negatively when dealing with money. These emotions can manifest as over exuberance or fear. Both client and advisor need to understand the behavioral responses driving decision making. Without this mutual insight, every outcome of the financial planning process becomes a potential complaint. Identifying each person’s financial personality regarding how that drives decision making, will reduce costly complaints.

This article was previously posted on Financial Advisor Magazine Online. The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation, and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors – Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). For more information click here.

Know Your Client Communication Behavioral Finance

3 Ways Personality Testing Crushes Risk Tolerance Questionnaires

Considering the tidal wave of fear-driven headlines these days, it’s tough focusing on the biggest issue we should be worrying about. Climate change causing the oceans to rise? Over-exuberant stock market heading for a crash? The New England Patriots winning another Super Bowl?

The problem is that human brains just aren’t wired to make accurate risk predictions. Financial advisors know this, which is why they rely on tools to help them evaluate their clients’ tolerance for investment risk. Combine that with the DOL fiduciary standard, and you can begin to explain the sheer number of risk-assessment models available to advisors.

However, the new legislature has not yet helped us define terms such as “know your client” or how to best accomplish it. In theory, advisors are required to understand the goals and financial circumstances of the client, so that they can create solutions with an appropriate level of risk. That may sound straightforward, but human behavior and the response to risk is complex. What exactly should you measure to get the correct answer?

Risk tolerance questionnaires were meant to help with that quandary. Its primary purpose is two-fold: to take the risk temperature so that the advisor can create a portfolio with the volatility that matches the clients’ comfort level and to give the advisor armor in the event of a lawsuit. After all, concrete and measurable risk numbers should be the best evidence that you have made every effort to offer prudent advice. Right?

Is Personality Testing the Answer?

risk toleranceIf directly measuring anticipated response to financial risk does not work, what can advisors do to get a snapshot of the client while still standardizing and proofing the process enough to hold up in court? One company thinks that psychological profiling is the way. DNA Behavior International, an Atlanta-based firm founded by Hugh Massie, has developed a very different take on the traditional risk tolerance questionnaire.

Their product, called Financial DNA, measures the core personality styles of clients and prospects by combining psychometrics and applied mathematics. With the underlying research powered by Georgia Tech University, the company argues the results of its patented assessment stand longer and are more difficult to ‘game.’ (See How Risk Tolerance Software Is Disrupting Wealth Management)

How do they do it? The Financial DNA assessment is a series of 46 questions – an unusually high number when compared with other products. But you won’t find any of the same-old financial risk questions on the list. Leon Morales, the CRO of the company, explained that the traditional questionnaire format allows users to fake results by choosing what they believe to be the right answers, whether consciously or unconsciously.

Financial DNA uses a set of forced-choice questions that focus on communication style, behavioral biases, and goal setting. The resulting risk profile is based on the snapshot of the clients’ core biases and decision-making preferences and is more accurate, Morales claimed.

The goal of the product is to help advisors become wealth “mentors,” according to Massie. Their psychometric-based system leverages comprehensive behavioral insights to more accurately measure each client’s risk appetite. Their client’s report increases in their rate of asset gathering when using their product versus standard risk tolerance questionnaires, Massie reported.

If that sounds really different from the typical risk tolerance questionnaire approach, you are right. Things get even more interesting when it comes to the execution of the idea.

Risk Measurement Methodology: It’s Harder than It Looks

risk toleranceExisting risk tolerance questionnaires are not without their caveats. Most solutions on the market generate their assessments through a series of financial simulation questions and what-if scenarios. What percentage in a portfolio value decline would a client consider acceptable? Would he prefer a certain gain of 8% or a 50/50 chance of either losing 30% or gaining 100%?

There are 3 potential problems with this approach.

The first one is the overly technical nature of the questions. For a client that’s not financially savvy, the choice between a sure gain of 8% and a chance to lose or gain a larger percentage of the portfolio value can be confusing. Some tools work around this by quoting specific dollar amounts instead of percentages. That approach makes the question more tangible but no less theoretical.

One of those tools is from Auburn, CA-based Riskalyze. Their chief investment officer, Michael McDaniel, believes that their risk number assessment that advisors use to understand how much risk a client can handle or tolerate effectively captures all the impacts of an investor’s psychometrics and personality.
And because [they] aren’t simply relying on human interpretation of different psychometric results, but instead have built a quantitative, objective approach to gathering mathematical data points, [their] advisors tell [them] that the results they get and the applicability of those results are vastly superior to the other approaches to psychometrics that they have used, McDaniel noted. (See Smart and Agile: Riskalyze and Quovo Help Advisors Stay Ahead of Robos)

The second problem is response bias.Wikipedia defines this as a wide range of cognitive biases that influence the responses of participants away from an accurate or truthful response. They are most prevalent in studies that require participants to self-report their responses.

In other words, a self-reported response to a future event is often quite different from the actual response in a real life situation. Sure, a client might tell you he would accept a possible 33% decline in his portfolio value when he is sitting in your office. But that response is probably not the same one you would get if the market were actually crashing to Earth.

A 2012 study of risk tolerance questionnaires showed that many products failed to accurately predict client behavior when they are under pressure. Not surprisingly, loss aversion and self-assessment questions fared better than questions based on economic theory.

Other applications take a similar approach. FinaMetrica also uses a psychometric-based questionnaire, but has 25 questions, which could more suitable for use by financial planners providing a comprehensive multi-goal planning service, co-founder Paul Resnik stated. Late last year, FinaMetrica announced an abbreviated 12-question version that was targeted at enterprise clients such banks and insurance companies that need to generate risk tolerance quicker and scale the process across a larger client base.

The third problem is the complex nature of what we are attempting to measure. Risk tolerance is the client’s willingness to take on risk. Capacity for risk refers to the client’s financial ability to absorb the consequences of taking a risk. For example, a client could have a high stated willingness to choose a volatile portfolio in exchange for higher potential gains. If that same client is so close to retirement that his financial ability to weather a dramatic drop in portfolio value is low, low capacity for risk might render high-risk tolerance irrelevant.

Then there is risk perception: how risky the client thinks the markets (or specific investment choices) are. If perceptions are not grounded in reality, clients can make decisions that are at odds with their risk tolerance and capacity for risk. Most tools lump those three sub-categories of risk into a single number. That approach can be misleading. The relative importance of each component is different for every client, and the one-number answer does not accurately reflect those dynamics.

Test-Driving Financial DNA

Clients and prospects can take the Financial DNA assessment from a personalized link shared by an advisor in an email. Advisors also have the option of embedding the link on their website. The assessment can be done on any device and takes 10-12 minutes to complete. Assessment results identify an individual’s preferred communication style and offer insights into automatic decision-making processes. The tool also places the individual into one of seven risk groups (1 being most risk-averse and 7 being most comfortable with risk).

Once a new assessment is completed, the advisor receives an alert via a sleek dashboard. Results can be used to guide the next conversation with the prospect or client.

Our favorite part of the dashboard is its ability to combine assessment results with real-time market data. Dubbed Market Mood, this feature places every client on a scale from exuberant to apprehensive depending on his or her personal biases in the context of current market performance.

For example, when the market is up strongly, there may be some clients that become anxious about an impending decline. Financial DNA provides recommendations on how best to placate each client based on their psychometric results.

Sleek graphics give the advisor a pulse of the overall client base while the drill-down reports offer specific action suggestions based on every client’s preferred communication style. For example, based on Jane’s portfolio risk group, current market performance, and preferred communication style, the system may recommend the advisor sends a market analysis summary, an informal text message or an invitation to an in-person meeting. Advisors report that Market Mood offers a structured approach to engaging clients at the right time. We also love this functionality integrated with SalesForce and other available CRM platforms. And a deep API build-out?launched last year.

The platform has a few other interesting applications. The system-generated risk group assessment for the client is automatically compared with his or her portfolio risk as well as the advisor’s personal risk group. A scenario in which client Mary has a risk group score of 2, her advisor has a score of 7, and Mary’s portfolio falls into group 6 would be flagged as a potential compliance risk. Within larger firms, assessment results could be used to pair incoming prospects with advisors. Just swipe right for a perfect match!

Another application, shared by family offices that use the product, is in combining assessment results for multiple family members to better predict and manage interpersonal dynamics in decision-making.

Pricing and Implementation

Financial DNA offers three packages based on an annual subscription model:

  • Introductory Package $135/month/advisor.
  • Behavioral Finance Package $290/month/advisor. Includes their Client Market Mood Dashboard plus other options. (Their most popular option)
  • Certified Wealth Mentoring Package $370/month/advisor. Includes all lower features plus additional coaching, training, leadership and team development courses.

Some of the advanced training includes helping advisors and portfolio managers to develop their own emotional intelligence and better understand what biases they bring to the table. This helps firms improve their interaction with with different clients, improves client overall satisfaction and reduces complaints.

Their clients include a wide range of firm sizes from small registered investment advisors to broker-dealers, banks and insurance companies, Massie explained.

Personality Assessment as a Marketing Engine?

Financial DNA offers to improve client communications and create a value-added differentiator that will help with client conversion and retention. Current users offer anecdotal evidence of prospects that became clients because the advisor applied insights from the assessment to structure the conversation in a way that made the client feel deeply understood. The marketing application itself isn’t new: Riskalyze has long positioned its offering as a tool to help advisors improve prospect-to-client conversion. As more advisors begin to use Financial DNA and more data becomes available, we would be curious to see their extended results.

Every risk assessment tool has its limitations. At the end of the day, a risk score or personality profile is only the start of a bigger conversation. The best approach combines an assessment of the client’s willingness to take risks with his or her financial goals and capacity for taking risks. Financial DNA promises to help advisors tailor communication styles to match client preferences and guide triage efforts when the market hits a bump. In giving advisors a tool that goes beyond risk assessment to improve their ability to reach and coach clients, this platform’s innovating approach may be onto something.

Money Management Apps

Make Money Management More Manageable: 5 Free Apps

Not all FinTech is B2B or strictly geared towards financial advisors. In fact, there are some really cool apps out there to make money management more manageable. Here are 5 free apps to help you achieve your financial goals.





At DNA Behavior, we use Venmo nearly every day to settle up on lunch expenses. Venmo allows users to transfer money between one another using their mobile app. When a user pays someone else, the funds are drafted from their bank or credit card, and when funds are received, they are deposited into their Venmo account to form a balance. If you use a bank account, this service is 100% free.

Pro tip: Have a friend that habitually doesn’t pay you back? Venmo is great because the app notifies users when they have unpaid bills, and even allows users to trigger these same reminders.




Taking turns on expenses or meals on a long trip, in reality, never ends up even. Last month, I traveled to the Pacific Northwest for my 30th birthday. There were four of us on the trip, and each person contributed to various things along the way. I routinely got Starbucks for everyone in the morning, and we then took turns for dinner, parking, and tours, etc.. Splitwise tracks these transactions and allows you to easily split expenses with friends and make sure you get paid back, problem solved. The app figures out the over/under of each person and determines a balance of who owes who what at the very end.

Pro tip: Use the Venmo integration with Splitwise to settle-up for an entirely cashless transaction!




Free stock trading – yes, free. Say goodbye to $10 trading fees with this no frills, FINRA approved, brokerage mobile phone app. Traditionally I have been a TD Ameritrade user, but lately, I have started to use this app for two reasons:

The app credits you up to $1,000 of your pending bank deposits right away, rather than having to wait while your funds are on hold 3-days. The same goes for making funds available for reinvestment immediately after you make a sale.
The app notifies you in advance of scheduled events – like earnings, dividends, or splits, so you can get up-to-date information at the right time.




What is your net worth? If you don’t know, you can find out in about 15 minutes using this app. Mint allows you to tally all of your bank, brokerage, and credit card accounts with your cars, houses, loans and expenses to provide you real-time net worth and budget details on your phone.

Amateur tip: If you’re bad about paying your bills on time, Mint reminds you when they are due, with push notifications.

Pro tip: Use the goals feature to track your funds earmarked for buying a house, saving for college or retirement, etc.




Recently, I bought a pair of high-end hiking boots, but then they went on sale the following week. No buyer’s remorse here! Paribus tracked my purchase and automatically requested a refund. The price difference is on its way, and I didn’t have to lift a finger – not even to open the app!

Each of these mobile money management apps is making the seemingly small transactions ever easier, either tracking or saving our hard-earned money every step of the way. About the time you find yourself toiling away at some ordinary, mundane situation, someone else has figured out an app for that.

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Solving The Dangerous Voids in Risk Profiling

No doubt, intense discussions surrounding risk tolerance and behavioral finance are on the rise. Michael Kitces, who writes the Nerds Eye View Blog, has written a very good summary on the state of play regarding risk tolerance questionnaires in his article: The Sorry State of Risk Profiling Questionnaires for Advisors.

Michael articulates various risk factors in distinguishing between tolerance, capacity and perception. Likewise, for advisors using Financial DNA, addressing the differences between tolerance, capacity and perception is very clear. And these users are provided with the structured framework in which to do it.

Then there is how the risk profile is used. In goals-based planning, where the client has a portfolio designed to achieve buckets of goals, there may be multiple risk profiles. Given that there are different goals, the risk tolerance of the client must be known and the framework outlined and applied.

Many advisors believe that risk tolerance can be determined by observation or casual interaction. However, these methods are neither objective nor validated. Relying on the advisor’s perception of the client under preset circumstances (in a comfortable office or out for a meal) opens the door to a myriad of pitfalls. The advisor is influenced by their own risk profile and biases, which removes objectivity. The client, while self-reporting, may not be faced with the pressures of considering a volatile market or other life-changing event, which would alter decision making or goal-setting, again removing objectivity from the equation. Also, not using a validated psychometric risk profiling process means that the advisor does not have a consistent process for handling the risk conversation with the client. This further leads to discolored results, and not just for a given client, but across the entire firm.

While current regulations do not specify that a validated psychometric process must be used, it is the direction in which we’re headed. If the firm wants to have a robust process of mitigating client complaints and maintaining compliance, these tools provide the solution. Plus, as Kitces points out, it is not just the tool itself, but also the planner’s behavior and skill in deploying the tool that is important.

Conversely, some advisors state that they do not wish to bother a client with more paperwork, so they do not have them complete a risk questionnaire. But experience shows that the addition helps keep the focus client centered during the planning process, plus the client feels more engaged because they’ve participated at a higher level. So it becomes a service quality enhancement, which deepens the advisor / client relationship and ultimately leads to greater revenue.

Next, the discussion turns to the design of the actual risk tolerance questionnaire – “right data in, right data out”. Kitces is right (as is Plan Plus), most tools are inherently flawed for many reasons, and many purport to be something they are not. The questionnaire structure is important to the outcome, and must follow an accepted psychometric model.

Our view is that all of the risk profiles (even the validated ones) use situational based questions – that is, the client could respond to the questions differently depending on any one (or combination of) market or personal events, attitudes, feelings, perceptions, education etc. While this template provides a basic baseline profile, it does not provide the most accurate or effective insights as to the emotional state of a client. Daniel Kahneman, psychologist known for his extensive work in behavioral finance and decision making, details our “Level 1″ automatic decision-making style as when we are under pressure or how our baseline, “hard-wired” instincts will drive decision-making. So unless a clients (or your own) Level 1 style is known, it is impossible to build a long-term portfolio, as it will be emotionally incompatible. So the questionnaire has to be designed to uncover this Level 1 behavior – free from personal or situational bias. The Financial DNA design does just this and the validated results are accurate and constant over time.

Whats missed in all of this is risk tolerance being only 1 dimension of a clients financial personality. There are several more factors to consider within the broader field of behavioral finance in order to fully understand the decision-making biases of both the client and advisor. Not communicating these biases only creates more risk to the client / advisor relationship, decision-making, goal-setting and overall compliance. So, the risk discussion is not complete without knowing the clients full set of behavioral biases and knowing how to communicate on the client’s terms. And this is why it is so important that the questionnaire design must be objective, robust and validated.

One thing for sure is, the regulatory process will not go backwards. And in today’s competitive and complex world, costly client complaints will not go away. But, on the positive side, those advisors who are investing in building client centered and compliant processes have the upper hand. So, invest in a stronger “Know Your Client” process, as what is good for the client will be much better for the advisor and firm too.


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Compliance Issues the DOJ Isn’t Telling You About

We make decisions in different ways – but most are driven by our natural biases. These biases can affect an Advisor’s ability to recommend the appropriate options for clients, setting them up for a potential compliance issue. Natural Behavioral Biases also can affect the client’s ability to understand and make rational decisions.

Psychologists Daniel Kahneman, Paul Slovic, and Amos Tversky introduced the concept of psychological bias in the early 70s and published their findings in the 1982 book, Judgement under Uncertainty.They explained that psychological bias is the tendency to make decisions or take action in an illogical way. For example, you might subconsciously make selective use of data and fail to apply common sense to a measured judgment. This is how people make mistakes or accidents happen, right?

Furthermore, Since its inception nearly three decades ago, behavioral economics has upset the pristine premise of classical economic theory – the view that individuals will always behave rationally to achieve the best possible outcome. Today it’s clear that the vagaries of individual and group psychology can cause irrational decision making by both individuals and organizations, resulting in less than ideal outcomes. Even the best-designed strategic-planning processes don’t always lead to optimal decisions.

If decisions on a certain course of action rests with individuals, and bias plays a significant role in human decision-making, then how can any investor (or their advisor) make rational investment decisions?

Improving financial decision-making requires limiting both investor’s and advisor’s own biases. In the advisor/investor relationship this is a difficult path to navigate because bias is hard-wired in our nature. It goes beyond simplistic Compliance rules & regulations, or a Risk Tolerance matrix. We’re talking about applying validated psychological assessment data to the landscape of financial decision-making. These are the same tools and insights that businesses and military groups employ in order to ID best fit for a role on a tem or determine predictable outcomes based on a given set of circumstances and the individuals involved.

Many of the behavioral economists over the years have presented sound academic papers on behavioral bias, but few have presented answers to this dilemma. However, one such answer could be for both advisor and investor to complete a robust and validated Natural Behavior Discovery process, a personality assessment. The 5 benefits outlined below are:

  1. Highlight areas of bias in both parties

Part of knowing one’s behavior beyond what’s presented on the surface (Learned Behavior) is understanding our internal quirks. These are the potential pitfalls, or holes, in our irrational decision-making process. By acknowledging them and mitigating their effects, natural bias can be effectively managed.

  1. Identify risk tolerance

Part of the basis of any successful financial planning is knowing the limits of a client’s exposure to market volatility vs. their goals for accumulating and managing wealth. As it’s part of a person’s personality, a discovery process platform will uncover their natural risk propensity and risk tolerance, so a financial advisor can plan accordingly.

  1. Minimize compliance issues

There are two (2) ways to avoid compliance issues, beyond following the letter of the rules and regulations placed upon advisors. First, ensure a clients goals are accurately identified. With a definitive path laid out in order to attain them, simple hints and reminders will help guide the client to stay true to their own plan in the face of market volatility or life changes. And second, matching personality types between client and advisor. Having similar communication styles and/or ways of thinking about finances, risk and decision-making will minimize the risk of mis-communication and misunderstanding. A proper assessment of all parties helps to ensure the closest match.

  1. Improve communication

Much like matching personalities, everyone has a certain communication style in how they best engage others. Some may need more upfront information, and then time to reflect and absorb or reach for themselves, while others just need a quick run-down of the bullet-points. Adapting to an individuals style helps keep every engagement successful and personal. Most compliance issues arise from poor communication.Assessing the styles of all involved helps close the gap.

  1. Deepen client relationships overall

The combination of the points detailed above provides a holistic method to successfully engage each client on a personal level, deepening that relationship while mitigating gaps in personality and communication. As the financial services sector becomes more familiar with behavioral economics and the role it plays in terms of strategic thinking in firms and with regulators, it is now expected that the financial advisory industry as a whole will take biases and irrational behavior into account in the product design and marketing process, as well as in their overall strategic planning. The opportunity is to now apply these psychological tools and insights to financial relationships and decisions, to achieve a specific goal with the investor’s best interest in mind.