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Andy Hart: Stop clients being their own worst enemy

The behavioural approach to planning keeps clients from financially misbehaving and answers the expensive questions

In my last column, I discussed how understanding human behaviour can make us more effective advisers. But how does the behavioural approach benefit the client? The fundamental purpose of behavioural finance is to use psychology to cut out financial mistakes. It helps us keep clients on track to meet their goals when, if left to their own devices, they would start financially misbehaving.

If we acknowledge we are all susceptible to these mistakes, it means we can tackle them head on. We can take the emotion out of financial planning and stop natural human biases from derailing carefully laid plans.

Behavioural coaching stops us from exiting the market at the first sign of a downturn, when it may actually be better to sit tight. Or over-estimating our abilities when it comes to managing our own money. Or thinking that trying to time the markets is a good idea.

We stop investors from becoming their own worst enemy. The fees our clients pay could be seen as an insurance policy against bad mistakes.

Maintaining behaviour

But eliminating mistakes is only half the story. We have got to make sure they stay eliminated by encouraging good financial behaviour going forward. We must help clients recognise when they are about to make an error and stop them before they choose a path that is not in their best interests.

First, sit down and build a live, collaborative financial plan just for them, tailored to their circumstances and goals. Then use investment management to fund it with a global, well-diversified portfolio of equities and bonds (ideally with more equities).

Then, crucially, make sure they stick to it. This is where the coaching happens, which is the most challenging bit. It is a simple idea, but not easy to implement.

As my friend and behavioural expert Greg Davies said at last year’s Humans Under Management conference, the right thing to do is often not the comfortable thing to do.

Holding clients accountable to their plan, making sure they stick to it, is where advisers earn their money.

Answering the expensive questions…

The behavioural approach also answers the expensive questions. These are the ones that deliver the big, life-changing answers. Am I going to be OK? If I don’t wake up tomorrow morning, is my family going to be provided for? When can I retire? These are the things that keep us awake in the early hours.

The fact we can sit down with clients and give them an answer to big questions like these should not be underestimated. They are some of the most expensive questions they can ask and the most important answers we can provide.

…as well as the unasked questions

The skill of behavioural finance also lies in answering the unasked questions. We see the things our clients sometimes don’t; the problems they have not anticipated or the plans they have got in their heads that are not going to get them financial success.

We answer the questions they never ask, like “what mistakes am I making?” or “where am I going wrong?”. Clients tend to think they are making entirely rational decisions but that is often not the case. These hidden problems are the ones we are here to solve for them. We are in the human nature business and the product we sell is wisdom.

Removing financial anxiety


When we have done all the above, what should be left for clients is a sense of financial wellbeing.

By addressing their problems, and tackling their biases and emotions head on, we have freed them from financial anxiety. We have built a plan. We have funded it. And we will help them stick to it.

We have created the circumstances for a life with the minimum of finance-related stress. If their lives change and their financial plans need to change too, we’ll sit down and adapt them to their new situations.

But until they do, their portfolios have been set up with full knowledge of how the markets operate, so all they need to do is sit back and let the plans do their work. Behavioural finance is not powered by knee-jerk reactions to market cycles or by whatever new investment vehicle is fashionable this year. It uses what has always been effective over time and a knowledge of human nature to get results. It is that simple. All the rest is admin and noise.

Andy Hart is founder of Humans Under Management

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There is one comment at the moment, we would love to hear your opinion too.

  1. All good common sense, especially globally diversifying a portfolio, predominantly in equities, not cashing out or suspending ongoing contributions at the first (or second) sign of a downturn. But I see no new ideas here.

    No matter HOW carefully you try to explain that, to get better returns over the medium to long term than cash or inflation, investors have to accept occasional (sometimes prolonged) down- as well as upturns, there will always be a few who expect their investments only ever to go up in value from day one, as if they’re some sort of turbo-charged cash account. Those types of client do the exact opposite of what they agreed, in the course of compiling the ATR questionnaire, that they wouldn’t. You can even send them a copy of the ATRQ with their answers to the relevant sections highlighted, but they just ignore the responses to which they put their signature and cash out anyway. They’ve agreed a medium to long term plan and they claim to have understood the nature of the journey ahead yet, when the first storm blows up, they decide it’s all been a failure and do exactly the wrong thing. It’s just the way some people are and all the behavioural finance in the world won’t change them. The best you can hope for is that at least 90% stay the course.

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