Written by: Ryan Scott
This last year will forever be remembered by investors for the impact of the COVID-19 pandemic. Global stocks suffered some of the quickest declines on record, and financial advisors around the world were faced with the daunting task of managing their client’s reactions to the pandemic.
If you had any discussions with your clients about Zoom (ZM), TESLA (TSLA) or, god forbid, Dogecoin, you could agree with me that there are more than a few behavioral finance lessons from the last year. In this blog post, we will cover the top 4 crucial takeaways financial advisors need to consider.
Determining Client’s Risk Behavior
Each individual has a level of comfort when it comes to taking risks, and your clients are no different. Accurately determining a client’s risk behavior canbe critical for long-term financial planning, especially during an unpredicted pandemic. When you know your client on a deeper level, you are able to create the ultimate investment portfolio. One that stands the test of time, market volatility, and global pandemics.
Evaluating Market Mood
Evaluating the current mood of the market is the most efficient way to stop your investors from making impulsive decisions that change investment positions at the wrong time. When faced with a global pandemic, the client’s inherent behaviors will take over. So if they have a tendency to make impulsive decisions, assessing the market conditions will enable you to predict such reactions and manage them. Investors typically have one of two reactions to market events. A reaction to market news they hear regarding movements of a particular index, and a reaction when they see their actual portfolio in their investment app. With the Market Mood API tool, you can measure both reactions; client-specific moods as well as moods powered by market indices.
Assessing Behavioral Biases
Each one of your clients has a set of biases that drives their decision-making process. They tend to be impulsive and lead to less optimal outcomes. Which begs the question, how can you manage your different clients’ emotions as the market changes? When it comes to the financial planning process, some clients tend to make financial decisions based on past experience and personal beliefs. Even though the goal is to make well-considered and forward-thinking decisions, our human bias inevitably gets in the way. The key is to assess their behavioral biases at the very early stages and build a portfolio structure accordingly.
Adjusting Client Communication
Client communication methods cannot be one-size-fits-all. Each investor client that you serve has preferred ways of communicating. When faced with pandemic-induced market disruption, communication is key to maintaining client relationships. Some financial advisors rely on email, others prefer in-person meetings. The truth is, similar to you, your clients have preferred communication. Being able to predict them will enhance their experience with you and develop a trusting relationship.
As the world resurfaces from the 2020 market disruption, now is the perfect time for you to reflect on what took place during the previous year and how your relationship with your clients has been affected. With that being said, one of our most effective tools that bridge the gap of understanding between you and your client’s behavior is our community’s power. 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.
Related: Do Investors See Value in Wealth Management? They Should, and Here’s Why