Using Behavioral Finance to Navigate Market Volatility
This article is relevant to financial professionals who are considering using behavioral finance with their clients.
There’s a lot of fuss around “behavioral finance” in our industry.
For good reason.
According to one study,1 the three main benefits of incorporating behavioral finance into a financial advisor’s practice are:
- Keeping clients invested during market volatility, which helps them stick with their long-term plan
- Strengthening trust and relationships with clients, which can increase retention
- Helping manage client expectations through effective communication
This all sounds great on paper—but real-life application has shown mixed results.
An internal panel2 found that while advisors acknowledge the importance and benefits of risk assessment, many struggle to clearly communicate the impacts, and see the need for better documentation of this process. Only a few of the advisors are actively applying behavioral finance concepts into their practices.
We’re striving to change that.
WisdomTree collaborated with Digital Nudging Tech LLC—founded by Shlomo Benartzi, Professor Emeritus of the UCLA Anderson School of Management, and a leading behavioral economist—to bring financial advisors a sophisticated, proprietary tool that helps them understand their clients’ needs and preferences.
The Behavioral Finance Assessment Tool, available on WisdomTree.com, walks advisors and their clients through a series of research-driven questions and scenarios. This 10-minute exercise produces a behavioral finance profile that can be matched against the client’s current portfolio and retirement goals.
The Tool analyzes many behavioral and financial characteristics, such as how clients experience the feelings of loss, their sensitivity to risk versus reward and the portfolio’s potential. The Tool’s output also showcases the likelihood of the client reaching their retirement goal.
And that’s not all…
WisdomTree also provides advisors with access to Model Portfolio recommendations. These recommendations provide a better match for their client’s behavioral finance profile and could potentially provide a smoother retirement journey, while still achieving their financial goals.
What makes this Tool different?
Unlike traditional assessments where clients evaluate their feelings subjectively, our Tool uses research-driven comparisons and questions that dive deeper, seeking to identify crucial financial and behavioral factors.
This truly innovative Tool offers your clients the potential benefits of being:
- Personalized—Two clients with similar economic factors can have very different needs for portfolio construction, based on their behavioral differences.
- Research-driven—Help clients understand how they feel about financial losses before they occur.
- Holistic—It factors in not only loss aversion, but also loss frequency, present bias and other behavioral insights.
Whether you use it for prospecting or client retention, WisdomTree’s easy-to-use Behavioral Finance Assessment Tool will help you better connect with clients and choose a personalized portfolio that truly fits their profile.
This matters in today’s markets.
Professor Shlomo Benartzi found that people aren’t just loss-averse—they are also extremely sensitive to short-term losses, known as myopic loss aversion.3 If someone is myopic, they are overly focused on recent events and are generally nearsighted when it comes to their investment performance.
I understand it’s impossible to avoid the headlines of geopolitical turmoil. But from a purely investment perspective, myopic investors are the clients at highest risk. They are the most likely to panic sell during a downturn, which is what has led, over time, to even bigger losses.
This is exactly why behavioral finance can help navigate market volatility.
Want to connect on a more personal level with your clients? Want to offer personalized portfolio suggestions that fit their true financial profiles? We invite financial advisors to give our Behavioral Finance Assessment Tool a try today.
2 WisdomTree’s Behavioral Finance Research Panel October 2020
Important Risks Related to this ArticleWisdomTree Asset Management, Inc. (“WisdomTree”) has licensed certain tools from Digital Nudging Tech LLC, founded by Shlomo Benartzi, related to behavioral finance and portfolio construction, which are included in the Behavioral Finance Assessment Tool available on WisdomTree’s website (the “Tools”). You are being granted access to such Tools as a financial professional. The Tools and any information regarding your use of the Tools, whether shared with WisdomTree or not, is WisdomTree’s confidential information. You may not discuss your experience with the Tools with third parties or publish or disseminate information about those experiences. The Tools are not thoroughly tested and the features provided in the Tools may not be available in a final release, if any. The Tools, including any assistance or output associated therewith, such as portfolio construction, Model Portfolios, assessments, discussions, output or other assistance (whether by WisdomTree personnel, third-party personnel or digital tools) are for information only and no material or Tools are intended to provide, and should not be relied on for, tax, legal, accounting, investment or financial planning advice. The financial advisor is solely responsible for making investment recommendations and/or decisions with respect to its clients without input from WisdomTree, including with respect to investing in accordance with any WisdomTree Model Portfolio or any particular security. This information should not be relied upon as research or a recommendation by WisdomTree regarding (i) the funds included in any WisdomTree Model Portfolio or otherwise per the output of Tools, (ii) the use or suitability of a WisdomTree Model Portfolio or otherwise per the output of Tools or (iii) any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. All information is provided "as is," without any warranty of any kind, express or implied, and WisdomTree expressly disclaims all warranties, whether express or implied, including implied warranties of merchantability, suitability or fitness for a particular purpose.
Ryan Krystopowicz joined WisdomTree in March 2016 and serves as a Product Specialist, ETF Model Portfolios. He is a leading voice in the content and commercialization of WisdomTree’s Model Portfolio Research Study & Model Adoption Center. Ryan also contributes to the commercial success of WisdomTree’s Model Portfolio offerings by supporting Distribution and the management of host platforms. His passion for third-party model portfolios and investment outsourcing was cultivated during his tenure at a Registered Investment Advisor where he took on a variety of roles within research and operations. Ryan received a degree from Loyola University of Maryland and is a CFA charterholder.