March 15, 2023
Picture of Thomas Oberlechner
Thomas Oberlechner

Founder of BehaviorQuant

Behavioral psychology is making its way into private banking and wealth advisory

How the insights of behavioral finance make advisory services and new customer acquisition in private banking more profitable

2 x 5 bullet points on how to practically improve the quality of advice.   

Behavioral finance examines how psychological, emotional, and cognitive factors influence financial decision-making. It offers a new perspective on traditional finance, which often assumes that investors and clients act rationally and make decisions based solely on objective information.  

In contrast, behavioral finance recognizes that the decisions of customers are influenced by a wide range of psychological and emotional features.  

In recent years, wealth advisors have increasingly focused on the insights of behavioral finance, and rightly so. 

Why is it important?

  1. Understanding the reasons for mistakes

    Behavioral finance helps to understand common mistakes made in financial decisions and how to avoid them. These include, for example, loss aversion and biased subjective perceptions of risks and probabilities.

  2. Better financial planning

    By taking into account human behavior patterns, advisors can develop better solutions for their clients and help them achieve their goals.

  3. More successful investment decisions 

    Behavioral finance can help minimize the harmful effects of emotions on investment decisions. This supports making more successful decisions.  

  4. Immunity to “the temptations of the market”

    Behavioral Finance can help identify and resist market temptations, such as herding behavior or all-too-present marketing, by helping us align our behavior with our long-term goals rather than being influenced by short-term changes.  

  5. Better financial awareness

    Systematic analysis can help increase the financial awareness of individuals and companies by helping them recognize unconscious behavioral patterns in their financial decisions and correct them. 

As a company, what can I do to profitably apply the insights of behavioral finance in banking and wealth advisory?

There are 5 concrete steps you can take to profitably use Behavioral Finance in banking and wealth advisory services: 

  1. Train your advisors 

    In order to implement the insights of behavioral finance into the advisory process, advisors should have basic knowledge about its most important concepts and insights. Interactive training that builds on advisors’ existing experience can provide them with important “aha” moments and background. Advisors connect the meaning of the concepts to their own behavior and can actively incorporate them into their advising.  

  2. Adapt the advisory process

    Often, the advisory process can be easily adapted to the insights of behavioral finance. For example, a special risk analysis method can be introduced that guides customers to assess their risk tolerance realistically. This can be done with the support of specific software. This leads us directly to the next point. 

  3. Use automated tools

    There are various tools that support customers based on the findings of behavioral finance. These include, for example, questionnaires for risk analysis or simulations that show the possible outcomes of decisions. To help customers make better decisions, these tools can be integrated into the advisory process. Software for automated surveys is ideally suited to generate relevant results and individual solutions for each client.

  4. Educate your clients

    To implement the benefits of behavioral finance into the advisory process, it is helpful to inform clients about their individual characteristics and decision tendencies as investors. Clients love to gain insight and knowledge about themselves. Providing this education helps them to better understand their own preferences, such as their risk tolerance and the reason behind certain decisions.  

  5.  Monitor and adjust

    To ensure that the findings of behavioral finance are successfully implemented in the advisory process, results should be measured and processes adjusted if necessary. Feedback systems and periodic evaluations of achieved improvements are helpful for this purpose. 

    Turnkey software and automated tools enable banks and wealth advisors to easily and profitably benefit from the insights of behavioral finance.