Where does an advisor add the greatest value? Through knowledge of investing and financial markets? Through the ability to help clients reach their retirement savings goals? By bringing order and a roadmap for the future to otherwise unplanned chaos? Professional financial advice is useful in these and countless other ways, but the greatest contribution, at least for some clients, is actually “behavioral”—advisors protecting clients from their own worst instincts and bring rationality to the planning process.
“Every time I turn on the business news, I'm reminded that it's often the loudest voices that get the press and the air time. In sometimes stark contrast, financial advisors, however, represent a voice of quiet reason,”
Advisors are all too familiar with these behavioral mistakes by their clients, including trend chasing and distraction caused by the news cycle. Moreover, many advisors now have familiarity with insights from behavioral finance, the breakthrough field that marries psychology with finance. But perhaps less well known is the key role “reason” plays in terms of improved decision-making as defined by the behavioral research program.
A rigorous albeit very academic
That is where the financial advisor comes in. The planner adds reason to the investing process, tempering the clients’ intuition. As Kahneman and Frederick explain, intuition can be overridden by reason: “Initial impressions are often supplemented, moderated or overridden by other considerations, including the recognition of relevant logical rules and the deliberate execution of learned algorithms.” Clients may come in seeking the hot new investment of the moment that they saw on TV. The cooler—and more rational—advice of the planner acts as a break on these impulses.
Advisors, as people, are vulnerable to behavioral mistakes themselves (and this entire topic is under-researched), but as professionals, they have the “relevant logical rules” and “learned algorithms” to make more rational decisions when it comes to investing. The “quiet reason” noted by Andrew Goldberg may be advisors’ most important “value add”—to protect the clients from themselves.