behavioral psychology

Behavioral Alpha: How Advisors Can Lead Clients to Positive Action

“It is an acknowledged fact that we perceive errors in the work of others more readily than in our own.”
― Leonardo da Vinci

In a year that has seen protests for equality, diversity and inclusion, many financial advisors have become more aware that they need to avoid making assumptions about clients based on factors like gender, ethnicity or sexual orientation. They’re realizing the importance of making a conscious effort to communicate more effectively to people of all backgrounds.

But advisors are still human, and even with the best intentions, they are still prone to bias.

How advisors can overcome these biases was the topic of a presentation by Dr. Daniel Crosby, Ph.D at this year’s Envestnet Advisor Summit Conference.

In his presentation, Crosby shared a four-step process for successfully delivering messages to clients in a way that will lead to positive action using four themes: Purpose, Proof, People, and Process. Crosby, the Chief Behavioral Officer at Brinker Capital, also described the need for financial advisors to take care of themselves during these difficult times.

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The Need for Behavioral Alphabehavioral psychology

According to an annual survey from Charles Schwab Investment Management (CSIM), 81% of over 300 advisors said they’re using behavioral finance techniques in client communications and interactions, up from 71% just a year ago.

Crosby emphasized the need for advisors to add behavioral alpha, which he describes as the “out performance attributed to hand holding, relationship management, and overall making sure that your clients just make a handful of excellent decisions at difficult times.”

Of advisors who use behavioral finance, the majority  62%  reported adding new clients, which is double those who didn’t use these techniques. About two-thirds of new clients for both advisors groups said they’d become dissatisfied with their previous advisors or wanted to consolidate their accounts.

Crosby described the reason why some people outperform when working with a financial advisor is because they keep their clients on the straight and narrow path during pivotal crossroads in their lives. Difficult times filled with uncertainty are like a financial advisor’s super bowl: this is the time when they can make the most impact on their clients.

Jay Mooreland, a financial advisor and founder of The Behavioral Finance Network, wrote about how emotions can cloud human judgment:

The truth is that we are emotional and make mistakes in our judgements because we are influenced by behavioral biases. These biases can encourage emotional and hasty decision-making, which can lead to costly mistakes and is not always beneficial in an investment context. Though while emotions can indeed lead to costly mistakes, the merit in understanding how emotions play a role in rational decision-making cannot be overlooked as a means of dealing with irrational behaviors. The study of evolutionary psychology has even highlighted the value of examining emotions and applying psychological principles to personal finance.

The longer an individual works with a strong advisor, the higher the behavioral alpha they receive. An important factor driving this is the growth in the relationship between client and advisor correlates to the client’s life improving over time.

If advisors want to maximize the benefit they have in clients’ lives, they must provide advice that sticks with them after the hour long Zoom meeting. Crosby explained four qualities of advice that gets lived out: Purpose (Why), Proof (What), People (Who), and Process (How).

What is Your Purpose?

Humans are sense-making machines. We live our lives answering the question: “Why?”

To maximize the value of advice given to clients, Crosby recommended starting conversations with why questions. The most basic examples are questions such as: “Why are you here? Why do you want to accomplish these goals?” Then you can follow-up with, “How are these goals related to your plans and desires for the future?”

Because humans are always seeking, if clients are given a clear and coherent answer to why questions, they are more likely to implement the advice. Or course, this leads to a better relationship with their advisor, and ultimately more successful financial growth.

Advisors can help clients avoid falling prey to “prospect theory,” which asserts that people feel pain of losses more than similar gains. Investors are prone to hold losing stocks, hoping they will rebound, and are more likely to sell gaining stocks, afraid of a potential downturn. Historical data indicate that the momentum of a gaining stock is likely to continue and those with a negative return should be sold off. Nevertheless, loss aversion can promote disadvantageous behaviors in the market.

Where is the Proof?

Once the why questions are answered, it’s important that clients know they are in good hands. Advisors need to make sure that their clients trust them as the financial expert. As Crosby mentioned, the advisor is the authority figure in this relationship.

Showing proof, evidence, and status as an authority figure will help the client visualize that they are following good advice from their advisor. Specifically, in the age of COVID-19, clients are looking for proof that is rooted in market history.

It’s a human tendency to think that whatever is happening now will be permanent, but this is rarely the case. While it’s true that COVID-19 will change many aspects of our lives, it will not change everything.

This pandemic has been a volatile time for the market and many clients panic and make hasty and drastic  changes to their financial plans. The advisor’s job is to steer them in the right direction with a clear mind based on facts, not emotion.

Who Are These People?

The main reason that advisors are hired is another aspect of the human experience: clients often have too much to think about. While giving clients evidence (or, the what), we cite our sources to drive it home. When we see a commercial for toothpaste tell us “9 out of 10 doctors recommend Crest toothpaste”, we’re more than likely to say “wow, good enough,” and pick that brand out the next time we shop. It’s the same idea here, according to Crosby.

When giving some kind of attribution to back up your statistic or example, like “This financial researcher says …”, people are much more likely to go ahead and agree with you, even when they know nothing else about the topic.

While of course it’s great to have quotes on hand from the best researchers and the most famous financial experts, this attribution can be simply your own advocacy. Crosby called this righteous peer-pressure. When discussing what the client should do, describing who says they should do it will create a lasting impression, making it more likely that the client will take the advice you give them, and further act on it.

What is the Process?

The fourth, and final step that Dr. Crosby describes is the need to allow clients to be a part of the decision making process while still making sure that they are on the right path. Your clients are paying you to help make their decisions, so asking them what they think they should do won’t help to make you look like an expert. On the contrary, telling or demanding the client to do something will probably mean that you won’t ever see that client again. There’s a sweet spot between asking and telling, and that is described by Crosby as guided simplicity.

For example, at the end of the advisory conversation when deciding on the course of action for that client, try giving them two options, then asking what they think. You’ve given the client some direction and advice on how to proceed, but you’re also allowing them to be a part of the decision making process. This last step will make the relationship between client and advisor stronger and allows your client to be a part of the conversation, leading them to likely be inspired to take action on the decisions you both discussed.

When it comes to a volatile market like the one we’ve seen, brought about by COVID-19, it can be difficult to tell clients to simply remain on the course that you both discussed before the pandemic hit. Remember, we (humans) are great at thinking that the current situation will last forever, leading your client to think that they need to dramatically change the plans already put in place. Crosby describes that by giving the client two level-headed options, it will help the client to feel like they are being a productive partner in the decision, while leading them forward in their successful financial path.

Advisors Need to Take Care of Themselves

Throughout Dr. Crosby’s talk, he gave an in-depth look at how advisors should take care of the clients during these unprecedented times, but he ended on one of the most important aspects: taking care of yourself. You simply can’t take care of others when you aren’t already taken care of.

Crosby describes that after the Great Financial Crisis, sadly 93% of financial advisors showed evidence of anxiety or clinical depression, and that nearly 40% showed evidence of PTSD. Oftentimes, financial advisors act as a barrier between a client and a bad decision. This line of defense is a stressful, and often overlooked, place to be as an advisor. This is where Dr. Crosby describes the need to understand and implement the PERMA model. Psychology researchers now understand that the population of people who are genuinely happy and content with their lives have 5 common attributions:

  • Positive emotion
  • Engagement
  • Relationships
  • Meaning
  • Advancement

Dr. Crosby even recommended taking these attributions and scheduling your day around each.

Behavioral Psychology

Understanding potential biases is only half the battle. To be more impactful on clients’ financial well-being, advisors must take Crosby’s four qualities to heart: Purpose (Why), Proof (What), People (Who), and Process (How).

By understanding PERMA and the need to truly take care of themselves and their clients during these difficult times, advisors will be better equipped to help clients successfully navigate through COVID-19’s complex financial markets and plan for the brighter future to come.

Click here and schedule a free Discovery Session to find out how Ezra Group can help your fintech firm grow revenue in the wealth management space.



The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at