Pandemic Payoff - The Time For Behavioral Finance Is Now

Charles Paikert

1 June 2020

Behavioral finance, the stepchild of behavioral economics, appears to have found its moment.

Clients are less likely to panic during times of crisis such as the coronavirus-fueled market plunge in March, say wealth managers using behavioral finance techniques.

“The current crisis puts the value of providing clients with the behavioral finance approach under the spotlight,” says Jonathan Blau, CEO of , a New York-based RIA. “Behavioral coaching teaches clients what works fiscally and emotionally,” says Toews, who also heads the Behavioral Investing Institute.

“You have to put in the time,” he says. “It’s the difference between watching a professional tennis player hit a backhand shot and then trying it yourself and practicing hitting a backhand shot with a coach and then trying it in a game. Clients need help building their neural pathways to invest effectively.”

That training has paid off during the pandemic, according to Toews.

“If a client has gone from being reactive to proactive and buys into the plan, then instead of explaining the need not to be emotional during the crisis, they’re marching right along with you,” he explains. Applying behavioral finance techniques means that the coronavirus can be seen as a particular catalyst for disruption, not an unprecedented one, says Grubman.

Clients who see the pandemic as unique and calamitous are more likely to react with “much more severe decision-making than those who see it as disruptive but not unlike many other disruptions,” he notes.

And while the COVID-19 crisis has highlighted the value of behavioral finance, its principles can benefit advisors in good times as well as bad.

“Clients feel better connected and are more loyal,” says Birke. “It’s not just another transaction for them.”

Using behavioral finance has helped his firm retain clients and enhance its brand in the marketplace according to Pagnato.

“We’re not losing clients because of the markets,” he says. “Keeping clients means recurring revenues and loyal clients means referrals. We’re also retaining employees who know the value of our approach and that enhances the firms’ culture. If it wasn’t for behavioral finance, I don’t think we’re capable of doing that.”