Behavioral finance advisors, or BFAs, are trained to help clients navigate the emotional and practical aspects of their finances.
After all, investing should be a science, but it’s often an art. And money tends to be an emotionally charged topic.
“Our hearts and brains are often in conflict over decisions, and that is no less true when it comes to money,” says Kelli Grelles, a behavioral finance advisor and participant engagement consultant at Moneta. “Even sophisticated and well-intentioned individuals fall prey to limited willpower, biases and a variety of cognitive blunders.”
This is why it’s important for advisors to understand not only how and where clients spend their money, but why they’re spending it, she says. “Sometimes, when you are trying to lead someone to make an informed decision, you have to appeal to their emotional brain and logical brain in tandem.”
Enter: behavioral finance, the advisor’s secret weapon in helping clients manage their money and their emotions.
Read on for more about what behavioral finance advisors do — and how they can help clients better manage their emotions and their money.
What Is a Behavioral Finance Advisor?
Behavioral finance advisors help clients negotiate the psychological and mechanical aspects of their finances.
“As many practicing financial advisors will attest, investing is as much a game of managing portfolios as it is of managing emotions,” says Brian Chang, a senior wealth advisor at Kayne Anderson Rudnick. “This is where a behavioral finance advisor can be of tremendous benefit — because they recognize that in the real world, human decisions are often influenced by emotions, biases and cognitive errors.”
The BFA designation is designed to help advisors understand the psychology of money, so they can better address it during the financial planning process.
“Although a traditional financial advisor listens to the goals and objectives of the client, too often the focus is on the numbers and practical side, rather than the core sentiments behind the goals,” says Kelly Gallimore, a wealth manager at Merit Financial Advisors. “A behavioral finance advisor is one who takes the time, and utilizes available tools, to understand clients’ natural — i.e. hard-wired — responses to market fluctuations and their approach to any financial decision.”
BFAs help clients explore the biases they have that may prevent them from acting on an advisor’s recommendations, even when the recommendation is in the client’s best interest, she says.
“Most attentive financial advisors listen to their clients to try to understand what key motivators are driving their behavior to help them make (the) best financial choices for their future,” Grelles says. “A behavioral financial advisor is trained on the elements of psychology and neuroscience that can drive those beliefs and behaviors and uncover observations that their clients may not realize or articulate.”
What Does a Behavioral Finance Advisor Do?
The day-to-day activities of a BFA are much like those of any advisor who has a fiduciary responsibility to work in their clients’ best interests, Gallimore says, except that BFAs provide an added layer of client service.
“Whether a prospect, a new client or an existing client navigating life transitions, the behavioral financial advisor first learns how an individual naturally reacts to market events (and) what motivates them to achieve their goals and their communication preferences,” she says. “This is taken into account at every level of interaction, enabling the advisor to provide the most valuable service possible.”
By understanding the deeper level of what goes into clients’ decision-making processes, BFAs can craft their guidance in ways that cater to the whole person, not just their financial picture, Grelles says. “For example, we can spend an entire meeting explaining to someone all of the logical reasons they need to save money in their 401(k) plan. However, if we do not also proactively address the reasons why they may not be, we might lose them before we have a chance to build the necessary rapport to affect a change in their behavior.”
Effective BFAs help clients make better choices and set realistic expectations. “In times of crisis, it could mean effectively engaging your clients and frame your messages to avoid costly mistakes,” Chang says. “During stabler eras, it could mean guiding your clients to gain a better understanding of their own financial picture and reinforcing the importance of consistently adhering to the plan.”
Behavioral financial advice enables advisors to provide guidance that integrates knowledge with empathy, Grelles says. “Being able to help shape someone’s financial peace of mind while caring for the emotional facets of that path can be incredibly rewarding for all involved.”
Behavioral Finance Advisor Requirements
The BFA certification is issued by Kaplan Financial Education and provided by Think2Perform, a leadership consulting firm. Getting the designation requires completing two online courses, requiring up to about 25 hours of study, plus passing the certification exam.
Applicants have 150 days to complete the process but can get extensions in 60-day increments by contacting Kaplan.
Once you’ve earned a passing score on the exam, you’ll get a certificate of completion and be able to start using your BFA designation.
To keep your BFA designation active, you’ll need to renew it every two years by completing 20 hours of continuing education for certified financial planners, chartered financial consultants or the American College’s PACE program.
Behavioral Finance Advisor Salary
Most financial advisors earn between about $57,000 and $154,000 on average. The median salary earned in 2019 was $87,850 with an average salary of $119,290.
More than two-thirds of BFAs told Think2Perform that the BFA designation increased their financial planning fees. Another 62% said their fees increased by more than 10%. More than 71% of BFAs produced between $300,000 and $600,000, and 28.4% produced more than $600,000.
What Is Behavioral Finance?
“Behavioral finance is the practice of helping clients to bridge the gap between actions and emotions,” Gallimore says.
This bridge is essential for long-term financial planning to be successful. “Everyone has a unique vantage point and strong emotions associated with money, and understanding the client’s views and subsequent behavior is paramount to the advisor’s role,” Gallimore says.
Failing to address the emotional side of your clients’ relationships with money only makes your job harder in the end. “Even the most complex, well-prepared financial plan works for the client only if they follow through with the necessary action items,” she says. For a client to follow through, she must be prepared both emotionally and psychologically.
Behavioral finance recognizes the psychological drivers that can impact an investor’s financial decisions. It acknowledges that everyone has biases that can impact their relationship with money.
Examples of these psychological drivers include these:
— Confirmation bias. This leads investors to focus on information that confirms their previously held beliefs, even if that information is inaccurate.
— Familiarity bias. This tendency causes investors to gravitate toward companies or sectors they recognize, leading to potential concentration risk.
— Loss aversion. This habit can lead to clinging to bad investments rather than selling them and taking a financial hit.
“Providing sound and rational financial guidance to clients is undeniably a valuable service, but it often misses the mark” because human beings are not rational, Grelles says. “Professionals who dig deep into behavioral finance have a burning desire not only to teach people about money, but also to understand why people make certain decisions when it comes to finance-related choices.”
Taking a behavioral view of finance can benefit both your clients and your business. “Understanding the many behavioral factors that influence investing decisions and guiding clients through their personal biases is a great way to create enduring and trusting client-advisor relationships,” Chang says.
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