Tech companies deploy behavioral finance tools for advisers

They seek to turn knowing more about clients into growing more revenue

Jul 21, 2017 @ 5:03 pm

By Liz Skinner

Behavioral finance research is increasingly finding its way into adviser technology aimed at putting clients on their optimal investment and planning paths, and getting them to stay there.

Most of the tools begin by assessing client risk tolerances and whether they are susceptible to common cognitive biases, including those that convince them to spend more money or feel more confident about finances than they should.

"We're already seeing behavioral finance being used by advisers to help improve the decisions their clients make," said Joe Duran, CEO of United Capital, which has $18.7 billion in assets under management.

Advisers are using these tools to deepen their relationships with clients and grow their firms.

United Capital last year began selling a technology platform for advisers that incorporates applications that probe clients' views about money and the deeper reasons behind how they spend and prioritize goals.

Advisers using the FinLife Partners tool have found knowing more about their clients has strengthened their connections to clients and has helped them grow revenue.

"The big conflict, which all behavioral finance is trying to solve, is what's good for you and what you want are almost always in conflict," Mr. Duran said. "Behavioral finance tries to balance giving you what you want without sacrificing what's good for you."

(More: Incorporating clients' risk scores into all planning decisions)

New technology from Advisor Software provides planners with detailed insight into six different behavioral factors that influence clients' thoughts on risk and decision-making.

Behavioral IQ, which came out in June, asks clients a series of questions and follow-ups that evaluate bias tendencies and generates a single risk number that's used to make the most appropriate investment recommendations, according to Mark Ferrari, chief research scientist at Advisor Software.

The tool also uses the individual assessments of the six factors, such as investment confidence and loss aversion, to recommend to the adviser ways of best communicating with them or what type of event might set off their fears.

"Knowing more about the clients allows the platform to provide more informed and better financial recommendations, which ultimately leads to higher client happiness and retention," Mr. Ferrari said.

Another new tool, Finworx from Lirio, also uses behavioral finance-based questions to provide advisers with a deep understanding of how their clients or prospects approach decision-making and how they react to risk.

It applies the results to judge which investment content to email to clients, and when to send certain clients reminders and who to try to influence with social media suggestions. The ultimate goal is to encourage the person to take an action recommended by the adviser.

"The tool acts as a nudge," said Clay Allen, Lirio's marketing director. "The right message at the right time to the right person can make an enormous impact on an adviser's business and on clients' lives."

(More: Fintech to make advisers better behavioral coaches)

Existing tools are just scratching the surface as to how behavioral finance can be incorporated within fintech.

Estate planning is one area where behavioral finance research could improve the process and outcomes, said Dan Egan, director of behavioral finance and investments at digital investment firm Betterment.

"Understanding people's emotions play such a big role when families are deciding how to pass money down to the next generation," he said.

The research also could be better applied to retirement planning and managing one's whole financial life over time, Mr. Ferrari said.

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