Behavioral Financial Advice: What to Know

Emotions are a powerful motivator when it comes to financial decision-making. Whether it’s excitement from a windfall or fear after a market drop, feelings can influence our choices and lead to impulsive actions. Behavioral advice, however, can help keep this in check by offering rational, thoughtful guidance.

In this article, we’ll offer an overview of behavioral financial advice and how it works. Specifically, this includes a breakdown of common factors that dictate financial decision-making and strategies an advisor may use to help you manage them. You’ll also learn about the Behavioral Financial Advisor (BFA) certification and how to choose the right professional for your needs.

How Behavioral Financial Advice Works

Behavioral financial advice focuses on managing the emotional and psychological aspects of one’s finances. “The premise of behavioral finance is that human beings are not rational profit maximizing machines, but often succumb to behavioral biases,” says Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University. Rather than simply relying on statistics and strategies, this approach helps clients recognize the biases that influence their choices and, in turn, make better financial decisions.

In practice, behavioral and traditional financial advice differ slightly. Instead of prioritizing managing a portfolio or creating a comprehensive financial plan, an advisor will seek to understand your thought process and emotions. Then, they’ll be able to help in a way that aligns with your goals.

For example, consider a client who feels anxious at the thought of putting their money at risk by investing. This fear—or loss aversion—can prevent them from achieving long-term financial growth. A behavioral financial advisor would recognize this emotional barrier and help alleviate it by discussing their concerns, educating them about risk, and potentially outlining investment strategies that may help them realize their goals without making them uncomfortable.

“It’s not just about what you should do with your money—it’s about understanding why you make certain financial choices and how to shift toward better habits that align with your goals,” says Melissa Murphy Pavone, CFP^®, CDFA^®, financial advisor and founder of Mindful Financial Partners.

Emotional Factors That Affect People’s Finances

Many different biases can influence one’s financial decisions. They can dictate how we spend, save, invest, and think about money. Behavioral financial advisors must deeply and insightfully understand these factors to identify and address them with their clients.

Below are emotional aspects that can influence a person’s financial decision-making:

Present vs. Future Thinking

In life, there’s a constant push and pull between instant gratification and long-term results. In other words, “our present selves tend to win over our future selves,” describes Johnson. Unfortunately, this can cause people to make financial decisions that impact their long-term gains and progress.

Additionally, people often experience lifestyle creep. According to Johnson, this phenomenon occurs when people let their “spending increase commensurate with their new salary.” As pay increases, so too does people’s need to elevate their way of life. However, this can result in the inability to save or invest for the long term.

For example, consider that someone wants to go on an expensive vacation or buy a new car. Alternatively, they could just invest the equivalent amount and earn compound interest for long-term goals, such as retirement. A behavioral financial advisor can help this person weigh these choices from both an emotional and mathematical standpoint.

Following the Crowd

Another motivating factor is the concept of herd mentality or the fear of missing out (FOMO). “People believe that there is safety in numbers; that is, they are less likely to be harmed if they are part of a large group,” Johnson says. This mindset, however, can also get you into trouble if it leads you down the wrong path.

Behavioral financial advisors may be able to identify whether you’re investing based on FOMO or herd mentality rather than objective logic. If this is the case, they can offer sound advice and work with you to make an optimal decision.

Loss and Risk Aversion

The fear of loss and risk aversion can be significant motivating factors for investors. It can cause people to avoid selling off securities or, in some cases, prevent them from investing altogether.

“Individuals need to be taught to invest for retirement and not to save for retirement,” Johnson notes. “The surest way to build true long-term wealth for retirement is to invest in the stock market,” he adds.

When you work with a behavioral financial advisor, they can communicate why risk is a necessary component of investing, as Johnson explains. They can also help you find investment strategies that align with your risk tolerance, making it easier for you to stay on track.

Recency

People may also experience recency bias. For example, if we experience a loss in the short term, it may result in added fear today. Conversely, experiencing financial adversity in the past and success today may result in overconfidence or reduced fear. “In essence, many investors assume what is currently happening (good or bad) is going to continue into the indefinite future,” Johnson explains.

How Behavioral Financial Advisors Can Help Clients

As much as we’d like to be completely logical at all times, humans are often beholden to their emotions and impulses. Behavioral financial professionals coach clients to help mitigate the effects emotions have on their decision-making.

Per Johnson, “One of the biggest value adds for an advisor has nothing to do with technical skills, but with the ability to prevent clients from making wealth-destroying mistakes.” By applying both financial and psychological expertise, an expert can more effectively help clients keep a calm state of mind and avoid crucial missteps.

Additionally, a financial advisor isn’t just a one-time source of information. Rather, they can offer ongoing support and behavioral advice when you need it. For example, consider you’re following a long-term investment strategy recommended by your advisor, but the markets drop 10% and cause you to feel a strong sense of anxiety. In this case, a professional can offer their insight and expertise—such as to maintain course—to allay your fears and to keep you on track.

Behavioral Financial Advisor (BFA) Certification

The Behavioral Financial Advisor (BFA) title is a certification offered by Think2Perform. The program allows financial professionals to undergo training and education to prepare them to help clients with psychological and emotional concerns. For clients, it serves as a signal that an advisor is well-equipped with the requisite knowledge to help them.

To obtain the certification, professionals must complete a 20- to 30-hour self-directed course, including a variety of videos, reading material, and lessons. After completing the course, candidates must pass a comprehensive exam based on the course material. The program costs between $1,200 to $3,057 to complete.

How to Find the Right Financial Advisor

When working with a financial advisor, you want to be confident they have the qualifications and skillset to help you effectively. Therefore, it’s vital to find a professional with experience and expertise who puts their clients first by adhering to a fiduciary duty. In the case of behavioral advisors with the BFA certification, they’ll likely carry additional titles, such as:

• Certified Financial Planner (CFP)
• Chartered Financial Analyst (CFA)
• Chartered Financial Consultant (ChFC)
• Chartered Retirement Planning Counselor (CRCP)
• Retirement Income Certified Professional (RICP)

If you need help searching for a professional, we recommend using this free matching tool. After answering a few questions about your current situation and goals, it’ll connect you with a vetted financial advisor who suits your needs.