Goal-based Investing Meets Behavioral Finance

Do you want a way to differentiate your advisory practice and improve investor success across the board?

With goal-based investing, success is measured by meeting personal life goals, not just how well investments perform. For investors, it can be incredibly motivating to work towards these goals. The process involves setting clear, measurable, and achievable financial objectives, developing a customized investment plan, and regularly monitoring progress. This approach considers an individual's age group, financial situation, risk tolerance, and investment horizon. It works well, but there’s a behavioral dimension that can be added for even better outcomes!

Incorporating behavioral finance into your advisory practice allows you to create a customized goal-based investment strategy that helps investors stick to their long-term plans. It can be used to explore an individual investor’s behavioral traits and cognitive biases so advisors can cater to them more precisely. Their service model can be shaped to create a truly customized experience. They can learn which influences and triggers may be driving irrational decisions, then mitigate any negative impact.

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Understand What Influences Decision-making
Behavioral finance is a subfield of finance that combines psychology and finance to understand how investors make financial decisions. It explores cognitive and emotional biases, like loss aversion and overconfidence. It looks at how these biases influence investor behavior and can potentially impact investment outcomes. In essence, behavioral finance helps advisors understand why investors behave the way they do and develop strategies to address what they uncover.

Clarity and Focus: Having a strategic (and personal) plan for building their future helps investors to focus on those goals…and avoid making impulsive decisions that could derail the best of intentions.

Answers the Important Questions: Mapping out goals gives investors a better idea of how to invest, where to invest, and how much to invest.

Motivation: Visualizing a desired goal or outcome can be a strong motivation to stick to the plan. It helps investors stay focused on their long-term objectives and avoid being swayed by emotional biases.

Customized Investment Plan: Taking an investor’s unique financial situation, risk tolerance, investment horizon, and life goals into consideration allows you to customize their investment strategy.

What You Get When You Incorporate Behavioral Finance
Behavioral finance gives you the keys to human behavior so you can further optimize a goal-based investing strategy. They make a powerful duo!

The Right Advisor Client Match: Human connections are stronger when people understand how others think. The same is true in the client-advisor relationship, so why not orchestrate the perfect match?

Commitment to the Strategy: When investors feel like their goals, concerns, and boundaries are understood, they are less likely to deviate from the plan.

A More Balanced Portfolio: Coupling goals with a person’s behavioral identity, you’ll be able to balance a custom portfolio, producing higher returns, and a more desirable outcome in the long run.

Fewer Mistakes: Investors are much less likely to make mistakes like panic-selling when their advisor is aware of the hidden influences on their decision-making.

Better Communication: Everyone has communication preferences. Knowing the right approach will help you deliver advice and knowledge…when and how investors want it.

Confidence: Informed decision-making, taking personal behavioral identity into account, builds confidence in investment choices and your firm.

Bias Awareness: Knowing what cognitive biases or “blind spots” lie beneath the surface allows you to help your client keep them in check.

Better Risk Management: By understating a client’s appetite for risk, you can help them find investments that they are comfortable with while nudging them when it’s in their best interest.

More Suitable Recommendations: Knowing your client on a deeper psychological level helps you to create an investment plan that is customized to their financial personality and personal goals.

Long-term Success: By developing a customized investment plan that is in sync with their behavioral identity and financial goals, investors are more likely to achieve long-term success.

Goal-based investing, on its own, is an effective strategy that helps investors create a manageable roadmap to achieving their most important financial objectives. But with the added insight provided by behavioral finance, advisors can help clients stay motivated, focused, and achieve their long-term goals.

If you want to stand out, let us help you put people before numbers and see what happens! The DNA Behavior web app uncovers everything you want to know about your clients’ behavior styles and money attitudes. It delivers so much more than a risk profile or personality test. You get the insights you need to understand your clients, truly connect, adjust your approach, and add exponential value the financial planning process.

If you’d like to see how it works, you’re invited to complete a personal discovery for free!