Befi for the Win: How Behavioral Finance Can Change the Game

Last week, I had the opportunity to sit down with Blair duQuesnay (co-host), and our guests Morgan Housel, Joy Lere, and Justin Castelli to discuss all things behavioral finance. I had done my research but still considered myself a novice going into it. I understood the concept of allowing emotion to get in the way of sound investing practices but was eager to go deeper with these three industry experts.

Behavioral finance (”BeFi”) is the principle that we allow our emotions to prevent good investment practices. It is much more nuanced and intricate, however, than I was expecting. The conversation started with Blair duQuesnay of Ritholtz Wealth Management, discussing why BeFi is just now becoming popular. Blair talked about how changing client behavior can be challenging. Simple things like shifting your mindset from being a saver to a spender require time and patience but ultimately help clients shift their perspective.

Advisors can use practical tools to communicate better with clients, which is why we were excited to bring Joy’s clinical voice into the conversation. She shared the science behind BeFi, what it is rooted in, and why we are trying to solve human behavior and biases. Joy emphasized that at its core, we are talking about psychology, not the math and science of investing. Humans have a unique relationship with money, which is tied to our identity, goals, and legacy. It is emotional, not just mathematical.

As we dove deeper into the conversation, Joy spoke about the second wave of BeFi and how we are just getting started. She gave us practical insight into how we can move beyond just using BeFi in onboarding, by changing your choice of words and making it an essential part of all client interactions. For example, telling a client they have biases and make irrational decisions makes them feel flawed, or that they are doing something wrong. Advisors need to be sensitive to this.

We then brought Justin Castelli in to discuss how he has been building his practice around BeFi and has seen its benefits firsthand. He had come to the realization that the clients’ goals were not aligned with how they were wired, which had real ramifications on the financial plans he was building. As a result, he now challenges conventional wisdom and asks clients behavioral questions such as, “WHY do you want what you want?”

Justin shared that this is not a one-time conversation, but something that takes time, patience, and reinforcement. We need to keep peeling back the onion to really understand our client’s goals, and that if you can get to the why, you can get clients to a spot where they can make the best decision for today and for their future selves.

Our final guest, Morgan Housel, was uniquely positioned to wrap things up. With recent news around SVB and the fragile banking system, we were able to discuss recency bias. Morgan believes it goes deeper, and that anyone who lived through the 2008 financial crisis, and now SVB, may be less trusting in the banking system.

What I found most interesting is that we all have scars from our experiences. Everyone gets scarred from negative market events, and these negative experiences tend to stay with us. But to me, the most intriguing part is that after a significant market event, like the Great Depression or the tech bubble, those investors will be more risk-aware and hedge against that happening again. The only problem with that is those market events are not likely to repeat themselves, which leaves investors exposed to the next market crisis.

To wrap up, we brought Joy and Justin back on to take live Q&A with our audience. They answered various questions and allowed the speakers to share their insights on social media, going YOLO on cryptocurrencies, and more. Our audience had so many questions and so much good feedback on what they had heard over the course of the webinar.

The 50 minutes flew by and ended with us sharing a few quick takeaways. One, you need to ask your clients “why,” and ask it more than once. Two, you must implement BeFi across your practice, not just at onboarding or random points. Three, clients are emotional, and money is emotional. You need a toolset to help clients manage the rollercoaster of investing.

We’ll see you back for our next Future Proof Webinar on Thursday, April 20!

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