Behavioral finance and the human side of advice

No matter where you are on the financial advisory spectrum, it’s clear your job is shifting from delivering tax and accounting services to enabling outcomes that lead to meaningful progress. Today, you must also have a deep understanding of each client’s relationship with money and understand what ultimately gives them peace of mind. Understanding the principles of behavioral finance can be a big help.

What it’s all about

The Corporate Finance Institute defines behavioral finance as “the study of the influence of psychology on the behavior of investors and on financial analysts.” Dr. Daniel Crosby, chief behavioral officer at Orion and author of “The Soul of Wealth: 50 Reflections on Money and Meaning,” takes it a step further. As he described on my podcast, behavioral finance analyzes how “messy, imperfect, irrational emotional human beings” make decisions about their money.

That aligns with my experience. I have found that most people tend to:

• Invest in the stock market at its peak and sell at its low.
• Succumb to sunk-cost fallacy. They keep pouring money into a business or investment that’s not working. They keep holding on to problem employees, hoping they’ll turn around.
• Lament paying large sums in capital gains or business income taxes.
• Have unrealistic expectations for the value of their business.
• Pay full price to accumulate tons of mileage and rebate points on their credit cards—but never use those points.
• Concentrate a disproportionate amount of their retirement savings in their employer’s stock.
• Spend hundreds or thousands of dollars a year on lottery tickets, with no return, hoping to hit the big ticket.
• Greatly overestimate their ability to predict the direction of the market or a particular stock.

How can I apply this to my business owner clients?

Crosby argues that as advisors, we need to start with a “human-first approach” to money before recommending solutions. Let’s say a worried client comes to you and says, “I’m going to owe too much in taxes this year. Can you help?” Before going into problem-solving mode, and before recommending tax loss-harvesting, a Roth conversion, or other tax mitigation strategies, take the time to uncover what your client is really telling you outside of their financial statements. What is it about their behavior and decision making that got them into a tax bind? 

Knowing this completely changes the nature of the advice you give them. By taking the time to understand their values, fears, and relationship with money, you’ll start to see them as a complete person rather than just another taxpayer, investor, or wealth accumulator.

Every client is unique, and we must approach each client relationship with a clean slate. Only then can we craft solutions for them that have the greatest impact. With his human-first perspective, Crosby said the key is to bring a client’s emotions, feelings, and behaviors into the financial planning conversations—not just their money or tax issues.

If a client tells you they’re thinking about exiting their business, don’t start recommending ways, for example, to minimize the capital gains tax on the sale of the business. Go beyond that. First, walk them through the process of thinking about the next chapter in their life. That’s when “business owner” is no longer part of their identity. How will they spend the extra 50, 60, or even 70 hours per week that have suddenly been freed up? Are they (and their spouse) comfortable with them being home all or most of the time? Do they have enough passions, interests, and organizations to keep them occupied and fulfilled? These are the kinds of questions you should be addressing with them before you start talking about the nuts and bolts of the transaction.

Crosby: “When we think differently and understand our client’s fears and hopes, we can have a greater impact on their life.”

Human First Financial Guidance®

Today, enlightened financial advisors, including accountants, are increasingly shifting their approach to human-first. According to Transitus Wealth’s Ross Marino, CFP®, CeFT® who trademarked the term “Human First Financial Guidance,” advisors should enter a client conversation with a blank slate.

“Instead of asking about their finances, we should ask what’s happening in their lives,” said Marino, “People don’t wake up and randomly think, ’I want to talk to an advisor today.’ Something prompted the meeting. We must understand why they want to meet.”

According to Marino, Crosby, and other Fin-Psych influencers, the shift to human-first means advisors should be asking most of the questions in a client meeting and really practicing deep listening–not talking. My new book “The Holistic Guide to Wealth Management for Accounting Professionals” has more human-first insights from Crosby, Marino, and other behavioral finance leaders that you can incorporate into your tax and accounting practice.

The importance of emotional intelligence

Human First Financial Guidance is about understanding the psychology that’s driving human behavior and human decision-making.

“Understanding how people think and how they make decisions is foundational to financial guidance,” said Marino. “Behavioral finance has been studied for many years.”

Like Marino, I’ve found very few accountants who would describe themselves as human-first, at least so far. From where I sit, emotional intelligence in advisory services, including accounting, has become increasingly important. Emotional intelligence (EQ) also plays a vital role in managing clients’ expectations, particularly during times of disruption and uncertainty.

“Advisors with high EQ have a distinct advantage over advisors who simply focus on the money,” he said.

I agree with Marino that behavioral finance has evolved to explain the psychological and emotional aspects of money. I’ve interviewed and studied some of the top minds in the field of behavioral finance. If I learned nothing else, it’s that the future of advice isn’t about providing a service or leading with knowledge; it’s about truly understanding a person first and helping them live the life they desire.

That’s where you come in.

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