Leverage Behavioral Finance to Engage Post-Crisis Clients

No one can argue that the economic crisis resulted in a change of client profiles. We’ve heard it from VIP Forum members. We’ve seen it in data from our proprietary client surveys. Industry experts continue to discuss it. And wealth managers are finally responding.  How? To engage the newly defined post-crisis client, wealth managers are incorporating behavioral finance into the wealth management advisory process.


To win business from post-crisis clients, VIP Forum research shows that advisors must demonstrate emotional intelligence and a clear understanding of clients’ needs, goals, and risk tolerances. The challenge is that clients cannot often articulate how they will respond emotionally to variable market returns and an uncertain economic environment. To account for the gap between clients’ perceived and actual risk tolerances, one leading VIP Forum member incorporates behavioral finance concepts, such as prospect theory and framing, into the advisory process. For example, behavioral finance claims that people make different decisions when presented with mathematical probabilities and averages than when presented with absolutes. The average investor finds probabilities less meaningful because they seem far removed from real life. The firm uses these theories and others to develop simulation exercises that better prepare its clients for potential market volatility.

One simulation exercise, designed to understand clients’ true risk tolerance and prepare them for potential volatility, requires advisors to run Monte Carlo simulations and create dummy monthly account statements based on each scenario’s outcome. Advisors shuffle the dummy statements and hand them to the client one by one. As advisors distribute each statement, they ask the client how it makes them feel and what they might do differently during months of particularly strong or weak performance.

Guided conversations around the dummy statements reveal “moments of truth” about clients’ actual risk tolerance.  By simulating market returns, advisors prepare the client to stick with the investment strategy the client and advisor define. This institution considers the simulation exercises an important contributor to the firm’s lower redemption rate over the past two years.  Click here to access the full case study.