As the needs and expectations of consumers continue to expand and evolve, so too does the scope of knowledge, skills and insights required of the financial planners who serve them.
In a world where technology has already automated product selection, investment management, asset allocation and portfolio rebalancing, the value of a human advisor lies in providing the pieces of the puzzle that cannot be replaced by an app or an algorithm. This includes the ability to connect with clients on a human level, gaining a strong understanding of what motivates them, and being able to positively influence their decisions.
These psychological factors are central to the growing field of behavioural economics – an area integral to the future of the financial planning profession. While extensive research has already been devoted to this field, it’s critical to continue investing in this important research – and to apply key findings in everyday practice – for the benefit of financial planners and their clients alike.
Although a solid base of technical financial knowledge will always be of the utmost importance for professional financial planners, effectively serving the needs of the modern day consumer requires much more than just technical expertise. Financial planners need to be experts on the myriad behavioural factors that come into play throughout the financial planning process, and in creating and implementing a financial plan that will stick.
Clients’ financial instincts are rarely logical. The choices they make are often rooted in emotion more than reason, and that’s why the guidance of a professional financial planner is so essential to help clients stay on track and reach their goals. In a market downturn, for example, many clients instinctively panic and sell their investments, even though that’s bound to cause greater long-term damage to their financial plan than if they’d held on through the volatility.
By recognizing clients’ susceptibility to irrational behaviour, financial planners can better understand their clients and relate to them. This enables planners to deliver advice in a way that more effectively resonates with clients, ultimately keeping them on track toward their goals.
Researchers have only begun to scratch the surface with respect to behavioural economics as it relates to financial planning. As we continue to gain new insights into the psychological factors underlying consumers’ financial decisions, the financial planning profession can continue to develop, and adopt increasingly sophisticated models and strategies for engaging clients and achieving positive client outcomes.
Since psychology plays a role in virtually every stage of the financial planning process – from the client’s decision to begin the planning process to implementing and sticking to the plan over time – there is vast potential for research in this area.
The so-called “implementation gap” – the factors that prevent clients from implementing the financial planning advice they receive – is the subject of a research project funded by the FP Canada Research Foundation that is currently underway. This project aims to provide insights into the reasons some clients fail to follow through on their financial plans, and the strategies financial planners can use to improve the likelihood that their clients will execute their plans.
In an era of technological disruption, the human connection provides financial planners with an undeniable competitive advantage over their robo counterparts. A human financial planner can relate to clients, build trust with clients and empathize with clients in ways that technology – no matter how advanced – can never do. Any tools that the financial planning profession can use to help enhance that human connection, including new research and insights into behavioural economics, will only strengthen that competitive advantage and help to advance the profession in the interest of Canadians.