Seven Keys to Successful Behavioral Coaching
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Michael Kitces recently observed: “The future of financial planning is not about dispensing expert financial advice, but helping clients engage in financial behavior change.”
Few would quarrel over the importance of behavioral coaching. It’s a significant contributor to the inability of investors to capture returns that available to all investors.
Yet little has been written about how financial advisors should do this. Much like my experience coaching advisors on converting more prospects into clients, I suspect each advisor has their style, and even within the same firm there’s no uniform approach.
Is there an evidence-based way to coach clients that is likely to help their proclivity to act emotionally?
What is behavioral coaching?
Behavioral coaching is a process that helps identify and address negative behaviors that may be hindering investment growth. It involves assisting clients in establishing investment goals, developing strategies, and providing feedback and support.
Behavioral coaching aims to help clients become more successful in their investment decisions and overall financial well-being.
The behavior gap
Nothing could be simpler than achieving benchmark returns (less the low fee charged by the fund or ETF). All investors need to do is buy and hold an index fund or ETF that tracks the broad-market benchmark.
If investors invested only in Vanguard’s Total Stock Market ETF (VTI), which has an expense ratio of 0.03%, they would have total returns of 11.62% over the past decade and 7.81% since inception on May 24, 2001.
I suspect many investors in this ETF didn’t earn those returns.
The culprit is the “behavior gap.”
The behavior gap refers to the difference between the returns that an average investor earns and the returns of the funds in which they invested. This gap is often attributed to poor investment decisions influenced by behavioral biases like fear, greed, lack of discipline, and overconfidence.
Overcoming the behavioral gap is where behavioral coaching comes in.
The role of emotions
The standard behavioral coaching advice involves education, setting expectations, and adherence to a financial plan. Often there’s a token nod to being sensitive to your client’s emotions.
The evidence is that it should be the reverse.
As a financial advisor, you may believe decisions about investing are empirical, based on processing data and experience.
Studies in neuroscience (discussed here) demonstrated that this is not how the brain functions. It’s not a computer taking in data, crunching it, and reaching a rational decision.
Emotions, processed in the brain’s amygdala, play a role in these decisions. That role is so prominent that patients with lesions in their brain preventing them from processing emotions have difficulty making decisions.
Emotions tend to play a more significant role when we are confronted with uncertainty and complexity, which is precisely the scenario in volatile markets.
There’s evidence that unconscious feelings drive investment decisions.
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Our emotions often lead us to make irrational decisions about our investments due to ego involvement or “psychic reality,” which causes us to rely on our feelings rather than rational data.
Psychic reality is the mixture of each investor's feelings and emotions based on the data they consume and how their brains process those inputs. It may be why investors act irrationally; they are making investment decisions based on emotions they are experiencing at the time. These decisions can lead to poor choices.
The interplay between emotions and decision-making has long been a subject of intense research and analysis in psychology and neuroscience. While considerable progress has been made in unraveling this intricate relationship, psychologists and neuroscientists still need to comprehend the full extent of the role emotions play in decision-making.
Emotions can vary significantly, and the impact of specific emotions on decision-making can be highly subjective. Accounting for these individual and contextual differences challenges researchers in fully unraveling this intricate relationship.
Emotions involve a complex interplay among various brain regions, such as the amygdala, prefrontal cortex, and insula, collectively contributing to decision-making processes.
The intricate details of how emotions interact with decision-making processes remain an ongoing area of exploration.
Your role as a behavioral coach
Few financial advisors have advanced degrees in psychology or neuroscience. If you struggle to understand the role of emotions in decision-making, approach behavioral coaching with humility.
I rely for my recommendations on the extensive research I did for my book, Ask: How to Relate to Anyone:
- Switch your “coaching” from conveying information to eliciting it. Your goal is to find out what’s on your client's mind and not to educate, lecture, or even provide perspective.
- Listen carefully to what’s being conveyed and ask relevant follow-up questions.
- Ask for clarification and elaboration with observations like: “Please tell me more about that.”
- Instead of assuming you know what your client needs to hear, ask this open-ended question: “How can I help?” Many of my clients tell me a typical response is: “All I needed was for you to listen to my concerns.”
- Before conveying any factual information (which the brain of your client may not be ready to process), ask this question: “Would you find it helpful if............(if you showed long-term returns, demonstrated how their IPS contemplated market volatility, etc.)?”
- The less you talk, the more effective your coaching will be.
- Your goal is to be the most curious and most interested person in the room – not the most intelligent.
By understanding the role of emotions in overwhelming your client and how challenging it is to understand them, you are well on your way to becoming a valued behavioral coach.
Dan trains executives and employees in the lessons based on the research in his latest book, Ask: How to Relate to Anyone. His digital marketing firm makes extensive use of artificial intelligence to help advisors increase their SEO rankings and improve their marketing and helps advisors integrate AI into their practices.