5 Things to Know About Behavioral Finance

To be able to fully understand an investor’s decision-making process, financial advisors need to equip themselves with the knowledge, skills, and understanding of Behavioral Finance.

When taken right back to the bare bones of it all, a human being’s most basic natural instincts are based on emotions and psychological reactions triggered by a variety of events. When it comes to making investment decisions, these natural reactions are brought into this as well.

A second way that humans make decisions is through conscious thinking. Now, these behaviors are slightly different from survival behaviors because they are learned as a result of experience, and so people are able to adapt to changes in their environment. 

These natural instincts as well as the learned behaviors, all carry across into the financial decision-making actions that people act upon.

 1. What is Behavioral Finance?  

Behavior Finance is essentially understanding the underlying psychology of financial decision-making. It combines cognitive psychology with economics and finance. 

The objectives of Behavioral Finance are to understand why individuals make certain investment decisions.

For example:

  • Emotions are responsible for our quick assessments that influence financial decision-making. Positive emotions lead to more risk-taking, optimism, and in addition, buying decisions are made faster. Investors are well aware of the roller coaster of emotions they go through including hope, excitement, euphoria, fear, despair, regret, and sadness.
  • Another example is Herd Mentality. Herd Mentality is when a person feels pressured into making a decision just to conform with the largest crowd and their rationale behind it is that ‘so many people are doing it, it must be right.’ The dotcom bubble is a perfect example of this. Between 1995 and 2000, investors were backing internet-based startups hoping that they would soon make a profit. 

2. We all have biases

We all have Behavioral Biases which are irrational beliefs or behaviors that can unconsciously influence our decision-making, and stray us from rational decision-making.

However, our biases lead us to make less than optimal decisions.

The Behavioral Biases embedded in humans are responsible for irrational decisions that result in poor financial or insurance investment. We need to be made aware of our personal biases and try not to let them influence our financial decision-making. 

As Hugh Massie, our CEO and Behavioral Strategist explains, we focus on 16 Behavioral Biases that affect people’s financial decision-making. Once you can identify and understand your top two or three biases, you can become a better decision-maker, especially when under pressure.

3. Spending patterns are written all over us

Behavioral Finance is the answer for advisors who want to learn more about investors and how they intend to spend their money.

It has typically been a problem that advisors haven’t had enough information and insight into their clients’ spending patterns and as such, could only create financial plans without truly understanding what people planned on investing in or saving up long-term.

4. You can’t spell “behavior” without “risk” in it

By now, as an advisor, you should be able to understand that a person’s behavior is intrinsically coupled with the amount of risk they are willing to take. To be able to help your investors experience long-term financial success, determining their risk factor will play a major role in determining their strategy.

When you choose to work with us, you will benefit from our Financial DNA reports that provide a step-by-step approach to determining the risk behavior of clients, couples, and advisors.

You see, every single person has a Risk Behavior number ranging from 0 to 100, and it’s based on their Risk Tolerance and Risk Propensity. A higher score means they are more likely to take risks. The score is normally distributed with an average of 50 and a standard deviation of 10.

5. Financial DNA takes the guesswork out of investing

When you work with us, we help you build a system to understand your clients, where you will be able to connect with them, and customize their experiences.

By understanding your client you will be able to communicate with them in a more relatable manner; you will to know and understand their risk behaviors and spending patterns and it will be easier to understand and determine their financial goals. 

Our Financial DNA API sets us apart because it measures 500+ behavioral insights and will be a way to add a human element to your data. This is done with details on how people communicate, invest, work and live their life.

In Conclusion

At Financial DNA, we have years of experience to help you better understand your clients. If you are interested in our Financial DNA investor experience, basic Financial DNA reports, and 1:1 onboard coaching, start a free trial today.

The Behavior & Money Insights Company – An Origin Story

Today, DNA Behavior is known for its groundbreaking approach in managing client-advisor relationships. Through its 500+ insights, companies have succeeded in reshaping the way they deliver wealth management services. However, have you ever wondered how it all started? 

Chairman & Founder Hugh Massie recently sat down with Nikki Evans, our Chief Learning Officer to discuss the journey that led him to create the Behavior & Money Insights Company.  

A Reformed Accountant Turned Entrepreneur

After graduating from the University of New South Wales in Sydney, Australia with an Accountancy and Economics degree, Hugh took a position in a large accounting firm so that he could get the best education and training possible. This was a path he never questioned up until that moment because everyone around him was doing the same. 

In the 10 years he spent working with Arthur Anderson as a Chartered Accountant, he gained experience in auditing and as a tax advisor covering a range of fields of expertise. The one thing that really impacted his view on the world was the opportunity he got to work in South East Asia for 4 years, in Singapore, and Thailand. As Hugh describes it “I think something happened to me there that was important”. 

Anyone who’s ever experienced working in a foreign country can attest that cultural shock can sometimes be challenging at first, but it inevitably shapes your personality and changes you in many ways. In Hugh’s case, working in the fast growing economies of Asia provided him with a lot of operating freedom in a less structured environment. This allowed his entrepreneurial thinking that already existed to start being more fully liberated. 

A Feeling of Lack of Purpose Led to DNA Behavior

The most asked question any CEO gets is “How did you start the company?”. Hugh is no exception. Over the years, he’s been asked time and time again how it all started and how he decided to build a behavior and money insights company. People usually expect an inspiring answer, details on the spark of genius that ignited this entrepreneurial journey.
For Hugh, it actually started with a career burnout: “Somewhere I lost my passion”. Hugh continues: “I had the sense that I had to go on the street with nothing to go to and figure it out, because I’m not going to figure it out sitting in the accounting firm and I need to go and try things to find out what would work. Although, I was knew clients wanted a customized experience in how they were dealt with by their professional advisors”.

At the age of 30, Hugh was working as a wealth mentor. He was helping his clients with their financial affairs as well as teaching them about themselves. That’s when the idea dawned on him. “People have these behavioral flips – Their risk appetites are not what they would say it was, under pressure people make all these emotional decisions”. That realization right there was the transformational moment for Hugh, where he clearly saw what DNA Behavior would be about.

A Community Waiting to be Built

The Behavioral Finance world may have been limited during the time Hugh Founded DNA Behavior, but the response was absolutely overwhelming. “For the most part, I’ve met very positive people that are supportive of me, developed me, given me lessons, some good, some bad, some tough, that have enabled me to grow”. 

Today, many financial institutions have successfully implemented the DNA Behavior approach and consider it to be a substantial advantage. Providing a stellar client experience which is personalized is the ultimate goal for each advisor, so when you understand your clients on a deeper level, they feel heard, supported, and prioritized. The best part of it all is that Hugh was able to build a community of financial professionals who found a supportive environment to guide them through it all. This has become more than just a company, this is a life mission.

A Mission Greater Than Money

“Part of the identity journey is to ensure people don’t define themselves by how much money they have, they define themselves with something that is much deeper inside them. That is a gift. If that has happened to make them a lot of money then great, or, will they in the future? Fantastic.”

Ultimately, the goal is that people fulfill their potential and make whatever wealth that comes from that, and in the process live a life of meaning. 

Money is what makes the world go round, it is very important, but it’s got its place, and it’s got to be well managed. That is not just invested, that is emotionally managed as well. We are in a great position to take people on that pathway to find out who they are, what their real talents are, get them to live that journey, and then to manage themselves along that journey. And hopefully, build great relationships, not have a life of regret. That is so important. 
“My work is going to be in that zone for quite a long time, as a business leader, helping people find that identity. Really trailblazing it, being that champion. As part of helping people trailblaze their identity I will be their champion and they can see – here is someone who did it.

Care to Join Our Mission?

DNA Behavior has been a growing community for over 20 years. We pride ourselves in the impact we’ve had on many financial institutions and organizations. In the future, we will continue striving to help more advisors build long-lasting relationships with their clients. If you’re interested in giving it a try, start our free trial to Financial DNA and unlock the power of behavior.

He’s Just Not That Into You

Are your clients cheating on you? Does the phrase “He’s just not that into you” remind you of something? Maybe a popular advice book about relationship struggles and how to accurately interpret signals your love interest is giving you? Most importantly, what does all that have to do with financial planning?

Well, knowing that 93.6% of your work as a financial adviser revolves around the behavioral management of your clients, I would say quite a bit.

How many financial advisors would you say your investors are working with at a time? Do you believe that you are the only advisor your investors have hired, or could it be that they have at least 2 or 3 more firms they are working with? 

The truth is, different investors are looking for different things. Some are seeking a self-service firm while others are more inclined to hire a full-service financial advisor. But what happens when one of your investors is looking for a balance between the two?

The main reason why your clients would look into diversifying their financial service providers is their wish to transition into a more tech-powered platform that provides them with online capabilities and potentially different advice perspectives. That is solely driven by certain behavioral styles, not all your clients will be inclined to do so.

What you need to consider here, if some of your investors are indeed interested in diversifying their financial service providers, is whether or not you are well equipped to address it and adapt.

You might think that this is an impossible notion. After all you are doing all the right things: delivering solid performance numbers, anticipating market changes, conducting engaging annual reviews. Why would they look for advice elsewhere?

Enter personality traits and behavioral biases. Financial Behavioral Biases are deep-rooted patterns of investor behaviors which, if not managed, can cause your client to make irrational decisions on a regular basis. Your role as their financial advisor is to coach them to manage these behaviors but to also be able to recognize and anticipate their behavioral biases.

With market dips, you may be feeling the opportunity to buy some bargains and assume that most of your clients trust you to do the right thing. But getting them a value doesn’t mean they are feeling good about the volatility. You assumed you trained them to look at the long term so all is right with the world.

However, your client might be wondering why you didn’t pick up the phone and give them a quick call of reassurance. And so, over time, this behavior leads the client to the feeling “you are just not that into them.”

That might be why your investors could be cheating on you. They are hedging their bets and seeing which relationship is worth keeping for the long term.

No advisor wants to admit they may be lacking in relationship skills. But why leave it to chance? Now is the time to adopt a system of objective behavioral intelligence so you can keep your clients in a long-term committed relationship with you.

With that being said, one of our most effective tools that bridges the gap of understanding between you and your client behavior, is our community builder. Powered by Natural Behavior, Financial DNA pinpoints virtually every human habit: the way investors and financial advisors communicate, invest, work, and live. Start a free trial today, and find out which unique style you match with.  

Using A Behavioral Science Tech Stack in Investment Committee Decision-Making

This article first appeared in Nasdaq

Most investment committees have a clear mission: Serve as stewards for assets of the organization they represent.

The committee must develop an investment plan according to the financial needs and circumstances of the corporation. So, if the primary role is to approve the fund’s investment objectives, how then do you ensure members of the committee have the appropriate behaviors to fulfill their role without bias?

The answer may lie in using your tech stack to power the investment committee – and its workflow.

Your next-gen investment committee

Recruiting the right people to this critical role – including having in-depth knowledge of their decision-making abilities – makes the difference between the success and failure of the investment committee.

But how do we define that fit-for-role? Is it a professional background? Education? Investment knowledge? And where does the diversity lens come in? (Or is it missing?) What about committee members’ inherent risk tolerance and behavioral bias toward investments?

Research demonstrates there are definite biases (both investment behavioral biases and workplace behavioral style differences biases) that should be considered when forming a committee with such weighty organizational responsibilities. Therefore it is increasingly important to know the inherent decision-making behavior and bias of each individual and how, in a diverse group, these differences will be managed.

Add this to your tech stack

As is the case with all critical appointments, the key lies not with their education qualifications, experience or talents, but with their ultimate behavior. What innate behaviors do they have – of which they may not even be aware – that will influence decision-making, especially financial decisions and/or those made during crisis?

Without the use of a validated behavioral profiling system of some sort, selecting individuals for an important function like an investment committee becomes little more than a lottery. And those are some weighty decisions to leave to chance.

Some financial leaders may not want to hear that their own perspective and powers of discernment may not be the only tools needed. Still, leaders committed to building the tightest, most reliable and trustworthy investment committee will want to introduce a behavioral finance (BeFi) tech tool that hones team member selection for the best possible fit and outcomes.

And why not? Tech is now an accepted part of so many aspects of financial processes, including throughout and across the investment community. In this case it is not usurping the wisdom, judgment and experience of leadership, but supplementing and heightening it by making key insights about potential committee members easier to access.

Financial planning and wealth management organizations are now investing in their value tech stack for everything from market insights and model portfolio construction to manager selection, cybersecurity and, yes, BeFi; so, using behavioral science (BeSci) to create a diverse investment committee should be welcomed, not daunting.

Behavioral diversity and better outcomes

Remember that diversity of opinion – about potential committee members and among committee members (once selected) – may not just come in the form of understanding different behaviors, bias and decision-making styles, but in experience, given that not every member of an investment committee has to be a financial expert. What is important is that members should have a wide set of perspectives and a willingness to be collaborative and open.

That’s why a depth of insight into the individuals to understand their decision-making approach and their likely response under pressure is crucial. Without such, important investment decisions will be flawed.

Selecting a BeSci expert, whether internal or external, to guide the committee using a behavioral discovery process can add a dimension of diversity to the investment committee by ensuring the group can function collaboratively and effectively while also preventing group think and other pitfalls you – and the committee – may not even know they were experiencing.

4 Critical Questions Financial Advisors Need to Answer Now

4 Critical Questions Financial Advisors Need to Answer Now

Amid the COVID-19 pandemic, financial advisors amongst other professionals are facing new challenges in the way they manage their clients’ investments and communicate with them. It is no secret that no matter how many financial crises we have gone through in the past, these are uncharted territories that we are all learning to navigate. As a financial advisor, it is your responsibility to consistently communicate with your investors and reassure them that you do have a plan.

Choosing who to trust to manage their wealth is one of the most important financial decisions your clients will ever make, and now more than ever is the time for you to show them the value you are bringing, and how much of a quantifiable impact your expertise has on their financial success. If you haven’t already, you can soon expect to receive wary phone calls from your clients seeking reassurance about their investments. These are the 4 critical questions you need to be ready to answer:

1. Am I going to be okay?

At this time, what your investors need more than anything is reassurance. It is hard not to worry about the impact of this market downturn on their financial future, and the only person they can turn to for guidance is you. Your role is not only to develop an investment strategy designed to meet their goals, but it is also managing their expectations during market volatility. Financial DNA can predict which clients are the most fearful and how to communicate with them, we call this Market Mood.

Start free trial to Financial DNA

2. Do we have an alternative financial plan?

This right here is what makes all the difference between many brokers and financial advisors. Your number one responsibility is to put your clients and their money first. Your expertise is used to its full potential in times like these when it is a matter of speculating what comes next, and what is the right move for their investments. This is an inevitable conversation that you are bound to have with your investors, and the key here is to identify every client’s unique set of communication patterns and comfort zones, and approach this conversation with those insights in mind. You see, every behavior drives a specific fear, that you need to unravel and address.

For example, if your client’s behavioral type happens to be Strategist (one of the ten unique styles of Financial DNA), the most effective way to approach this conversation is by having a quick phone or Zoom call, where you reassure your client and reinforce the fact that the volatility of the market will not derail achieving their goals, and provide a clear plan for how this is actually an advantage.

Download out 2020 Behavioral Finance Guide for RIAs

3. What steps are you taking to proactively anticipate change and new opportunities that are right for me?

Some clients (particularly those that have a higher risk profile) will react to the current market events with an opportunistic eye. For these clients, they are interested in the strategy and opportunity that they can take advantage of with the current market. We coach advisors to identify these clients with this Market Mood and use this as an opportunity to increase their AUM.

The truth is, this question is not necessarily tied to times of crisis. The very purpose of a financial advisor is to constantly anticipate changes in the market, and identify new opportunities for their investors. The COVID-19 pandemic-induced market instability is no exception. What your investors are really asking is “How much should I expect to lose?” and “Is this a buying opportunity?”

The key here is to re-address their risk tolerance. Financial DNA advisors do this by re-focusing clients back to their Financial DNA results. The results don’t change when the market changes, allow your client’s financial behavior, behavioral biases, and risk measurement to drive this discussion.

A good resource to learn more about the notion of Behavioral Biases is our extensive study of Predicting Behavioral Biases with Behavioral Finance.

4. Is my portfolio designed to match my risk tolerance?

Generally speaking, when identifying a person’s behavioral tendencies, you can predict how they will react to any given situation. Whether they are experiencing great success or under a great deal of pressure, using behavioral insights, you can always anticipate what their instinctual reaction will be.

Your clients’ behavioral tendencies do not change or fluctuate over time, neither will their reactions at their most stressed point. So when a global financial crisis occurs, you should not only be able to anticipate their reactions, but you should also be prepared to address their concerns in a way that aligns with their unique set of communication patterns.

You can learn more about how Financial DNA measures risk here, and the best way for you to experience it, is to try it yourself. Start your free trial today and let us see if we can pinpoint your risk behaviors and investing style.

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Bruising Times for The Markets

Bruising Times for The Markets

Uncertainty is the defining characteristic of the world we are in today. Trying to understand and compete in volatile markets can feel very confusing. Emotions will swing.

Those investors who always assume they are in control start to wobble as they see blows coming from all directions. And investors who rely heavily on their advisors to steer them could well be dealing with an advisor who is shaking and going through emotional swings of their own. However, investors and advisors who are behaviorally smart – that is, they know at a deep level their financial approach and reaction to markets – will survive this season.

Surviving the current market

Facing an economic meltdown, investors that ride out this tide of uncertainty are the ones who are behaviorally smart. Not because they hold impressive degrees, though they might, but because their greatest investment was the 10 minutes they spent getting to understand their hard-wired financial personality.

Yes, they may be required to manage the fear creeping into their family unit, but they themselves are confident in the decisions they have and will make as the world rocks. They know how to keep their heads and trust the decisions they made in more stable times.

They understand that life goals matter, markets will recover, and in every crisis staying cool and true to your inherent financial personality means you can see opportunities that market lows present.

Financial personality revealed

So, what will be revealed if you take time out from your home isolation to complete the Financial DNA Natural Behavior Discovery?

  • Risk behavior – risk-taking and tolerance.
  • Financial relationship management – communication style.
  • Financial planning management – spending and saving patterns.
  • Wealth building motivation – goal-setting propensity.
  • Financial emotional intelligence – emotional reactions.
  • Your Behavioral Biases – biases in making decisions.

And so much more.

We are committed to helping you answer these tricky behavioral questions and helping you to understand your financial personality, especially during these tumultuous times we are sharing.

I’ve put my teams on standby as a service to the financial industry to do all we can to help you manage your financial behavior. To start, consider these offers:

Mainly, be well and be safe.