How Financial Advisors Consider Emotions in Money Management

New technologies have given people access to more information and new tools to manage their money.

Robo-advisors can create and rebalance portfolios based on client preferences. However, automation does not take into account people’s emotional needs.

Experts say adding behavioral science to investing knowledge can help financial advisors achieve better results for their clients.

Advisors are increasingly using artificial intelligence tools for more repetitive tasks, such as research, planning and even stock selection.

This shift is one of the factors leading more investment advisors to focus on behavioral science to understand how and why people make the financial decisions they do. Behavioral economics combines the study of economics and the study of psychology to understand how people make financial decisions.

“For too long, as a profession, we’ve been taught that we should ignore emotions,” said certified financial planner Tim Mauer, advisory director at SignatureFD, which has offices in Atlanta and Charlotte, North Carolina. “We had better be wiser students of our customers’ behavior and emotions so we can better understand how to steer those emotions in the right direction.”

Instead of a quantitative approach to managing a mix of stocks, bonds and other assets, Mauer suggests a qualitative approach that reveals the objective of the person behind the portfolio.

“We focus our planning on the real human needs of our clients, rather than the tools and techniques we might use to help them achieve their goals,” Maurer said Wednesday during a session at CNBC’s FA Summit.

“The best investment is not necessarily the one with the highest long-term rate of return, it is the investment that our clients can stick with,” said Maurer, who is also a member of the Council CNBC financial advisory.

Keeping your emotions in check can help guide people through difficult financial markets and help them, as famous investor Warren Buffett once said: “Be afraid when others are greedy, and be greedy only when others are greedy.” others are afraid. »

Although AI can help find different ways to explain financial strategies, it cannot communicate with people.

“You can give great advice and people won’t take it. So creative problem solving requires being vulnerable and being able to communicate it in a way that will speak to them,” said Sam G. Huszczo , CFP and founder of SGH Wealth Management near Detroit. “No AI does this for you.”

Financial advisors can use behavioral science to understand people’s emotions and help them make better decisions, but it’s not therapy.

“Financial therapy involves addressing an intractable situation, in which someone cannot overcome a particular financial behavior,” Maurer said. “And then they work with a therapist who has a specifically financial bent, to go back in time and determine what may have generated this particular behavior in my past.”

Financial therapy delves deeper into issues that may be preventing people from achieving their financial goals.

“The financial therapist can strip away the layers so that people become more comfortable with their relationship with money and better understand why they make the decisions they do with money and thus work towards their goals,” said Ashley Agnew, president. of the Financial Therapy Association.

For example, Agnew says she worked with a client who had it in his financial plan to sell his family business to fund his retirement, but he kept derailing deals to complete the sale. To understand why, during therapy sessions, they delved deeper into his feelings about selling. He revealed that the business was the only thing his father had rented and they revealed his feelings from there to help him move forward.

“It makes a little more sense once you get down to it,” said Agnew, who is also a principal at Centerpoint Advisors in Needham, Massachusetts.

Financial therapists will often refer clients to licensed mental health counselors if problems, such as abuse, extend too far beyond finances.