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Finance is often seen as a purely logical field of study; however, individuals often overlook the emotional and behavioral parts of personal finance that are so important to one's investment habits and strategies. Oftentimes a major roadblock and limitation individual investors find in investing for retirement is the regular ups and downs of the market, when to sell and when to buy, and specifically knowing when to take one’s losses or keep a position open for future potential gains. By letting emotions get in the way of investment, individuals and families are at risk of letting fear and stress rule their investment decisions and even potentially influencing them to make a wrong or nonoptimal decision with their personal finances.
Financial advisors are trained to help individuals and families with these exact problems, to help them transform from emotional investors to rational ones. Financial advisors, specifically those with a behavioral finance advisors (BFA) accreditation, are advisors who have developed the knowledge and skillset to help individuals balance their portfolio during times of economic uncertainty or times of economic stability. These finance professionals specialize in the intersection of psychology and finance and are trained to identify and analyze the behavioral biases and patterns of clients. This equips them with the tools and resources to understand the impacts of biases on financial decision-making. Furthermore, they are specialists in developing strategies, such as diversifying investments, to mitigate these negative recurring biases and help their clients achieve their financial objectives without falling into the dangerous trap of emotional investing.
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What Is a Behavioral Financial Advisor?
The behavioral finance advisor (BFA) designation is a specialized subsector of financial advising that focuses on identifying the psychological factors and inherent biases that impact an investor's financial decisions. These advisors understand the general theory of investment is not just driven by rational thinking or decision-making, but can also be influenced by emotional decisions and spur-of-the-moment errors in judgment. Behavioral financial advisors take the time to understand the unique perspectives of their clients when it comes to managing their money or spending habits to create effective long-term financial plans with their financial behavior in mind.
Behavioral Financial Advisors focus on overcoming and challenging specific biases that individual investors may have when it comes to investing for their retirement. Some of these biases include:
- Self Attribution: A tendency to attribute good outcomes to good decisions and bad outcomes to luck.
- Herd Mentality: A tendency for individual behavior or beliefs to to those of the group to which they belong.
- Confirmation Bias: A tendency to process information by looking for, or interpreting, information that is consistent with their existing beliefs.
- Familiarity Bias: A tendency to prefer familiar options over unfamiliar ones, even when the unfamiliar options may be better.
- Overconfidence: A tendency to overestimate one's financial acumen.
- Loss Aversion: a tendency to fear losses to the point of focusing on avoiding more losses rather than making financial gains
- Anchoring: a tendency to use irrelevant information that supports one's bias or investment thesis to make subsequent decisions.
Services Offered by a Behavioral Financial Advisor
Investment Planning
Behavioral financial advisors are experts in helping their individuals and families identify their behavioral biases in investment decision-making. They specialize in developing strategies to help mitigate those biases. For instance, a behavioral financial advisor may help an individual avoid the temptation to want to buy or sell a particular investment based on the short-term market trend rather than focusing on the long-term strategy and goals set by the advisor. This allows for a behavioral financial advisor to help build diversified investment portfolios for their clients that reflect their long-term goals and their specific risk appetite.
Retirement Planning
Behavioral financial advisors can also help their clients by analyzing their behavioral biases for their retirement planning. They can do this by helping create and design retirement financial plans that account for those biases, specifically when it comes to investment, saving, and spending habits. For instance a behavioral financial advisor can help an individual or family understand the impact of loss aversion when it comes to retirement planning and investing.
Wealth Management
Behavioral financial advisors are also specialized in helping their clients manage their wealth and finances based on their core behavioral finance principles. This can include developing optimal strategies to prioritize wealth creation and wealth preservation, as well as building long-term financial plans to achieve financial goals and objectives. By specifically focusing on behavioral finance, behavioral financial advisors focus on helping individuals and families avoid emotional biases, such as fear or greed, by taking a systematic approach when making decisions regarding their wealth.
Qualifications and Requirements for a Behavioral Financial Advisor
To become a behavioral financial advisor, one must obtain a degree in finance, economics, psychology, or a related financial field. Due to the nature of behavioral finance combining both psychology and finance into a specialized field, many individuals also have advanced degrees in multiple subjects, such as a master's or Ph.D. in finance or psychology. In addition, behavioral financial advisors must also completed specialized training in behavioral finance in order to apply behavior finance principles in practice. Advisors must also have other necessary skills such as effective communication with clients, strong technical analytical skills, and attention to detail.
These skills are all used in conjunction to identify patterns and trends in financial data and develop strong long-term strategies to mitigate biases and achieve financial goals and objectives.
Traditional Financial Advisor vs Behavioral Financial Advisor
Traditional and behavioral financial advisors can sometimes differ in their financial decision-making approaches. While traditional financial advisors often focus on maximizing returns and minimizing risks, behavioral financial advisors go deeper in understanding and mitigating the impact of conscious and unconscious human behavior and emotions on financial decision-making.
Traditional Financial Advisor
Traditional financial advisors use a more quantitative approach to financial decision-making, focusing on short and long-term market trends and investment performance. They do this by using data-driven models to analyze market trends and develop investment strategies that maximize returns while minimizing risks. Financial advisors also evaluate financial statements, risk assessments, and investment analysis tools to help find and explore relevant investment opportunities that fit the individuals or families investment portfolio needs.
Behavioral Financial Advisor
In contrast, behavioral financial advisors take a more qualitative approach to financial decision-making. These advisors are experts in recognizing and mitigating the effects of human behavior and emotions on financial decision-making. They identify behavioral biases, develop strategies to minimize them, and achieve long-term financial goals by taking out the emotional human component. By focusing on the client's financial goals on an intrinsic level rather than market trends or investment performance, behavioral financial advisors help clients develop unique investment strategies that reflect their needs, wants, and financial goals and objectives.
FAQs
What does a behavioral financial advisor do?
A Behavioral Financial Advisor (BFA) is a specialized financial advisor that goes beyond just asset selection and allocation, but also offers practical services such behavioral advice to positively influence an individuals savings, spending, and investing habits.
What is the BFA financial designation?
The overall goal of behavioral financial advising training is to equip financial advisors with tools and resources to be financial coaches who can integrate conventional financial knowledge about markets and investing with research and findings from psychology and neuroscience.
What are the objectives of behavioral finance?
Behavioral finance can help individuals and families make better financial decisions by providing a better understanding of behavioral biases and emotional influences that can impact financial decision-making.
What are the advantages of behavioral finance?
By taking into account personal behavioral preferences and appetite for risk, behavioral finance enables individuals to create a more diversified and balanced portfolio that delivers higher returns with less risk in order to help individuals and families achieve their financial goals and objectives.
References
- https://www.finra.org/investors/professional-designations/bfa
- https://smartasset.com/financial-advisor/bfa-designation
- https://wealthtender.com/professional-designations/what-is-a-behavioral-financial-advisor-bfa/
- https://money.usnews.com/financial-advisors/articles/what-is-a-behavioral-finance-advisor
This material contains opinions of the author, but not necessarily those of Arrowroot Family Office LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this material may be reproduced or referred to in any form, without express written permission of Arrowroot Family Office, LLC. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Past performance is not indicative of future results.
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