A Financial Plan Is Not Enough

We can break down ways to invest into two basic categories:

  1. Based on a plan that is used to guide decisions
  2. Allow news stories of the day and feelings to dictate financial decisions

A financial plan provides confidence and direction to investors. It is foundational to the investment process, but it is not all. Unfortunately, many financial professionals offer a plan but do not provide the subsequent coaching to help clients stick with the plan.

The Investor Psyche

Advisors want to help their clients. But without a firm understanding of the investor psyche, it may be difficult to truly be effective. If you don’t understand the root problem/cause, you can’t deliver a viable solution. Unfortunately, Wall Street firms don’t do much training or provide many solutions to help you really know your clients. Things have improved with some training dedicated to behavior, psychology and mindfulness. But there is still a significant lapse in application. Knowing and doing are two very different things.

Investors are irrational – in other words they are more influenced by intuition and emotion than by logic and reason. A financial plan is not irrational; it is completely logical and rational. That is why a financial plan, by itself, is not enough. Investors need a complete plan that speaks to both sides of the brain. They need a financial plan and a behavioral plan.

Creating a Behavioral Plan

Most advisors don’t attempt to tackle the behavioral element. Some will do so “off the cuff”. Creating a behavioral plan, or behavioral policy statement, is a way to systematize your behavioral advice. There are many potential elements to a behavioral strategy; I share with you a few essential elements.

  1. Keep it Short. A plan that is several pages long may not be read and it certainly won’t be reviewed. Our moods and behavior change more frequently than our financial situation so it should be something that can be referenced often.
  2. Address the Noise. Noise is one of the biggest distractions investors face. Noise is information that may seem helpful but is either irrelevant or harmful to an investor’s decision. Identify a few and share strategies to help investors ignore the noise.
  3. Highlight Important Expectations. How might an investor feel at different times in the market? How will those feelings influence investors? And how should investors respond when they experience volatile/uncertain times.

What’s Next?

If you are already familiar with human behavior, biases and the psychology of decision making, you are ready to start building your behavioral plan. What I shared above could be a good start to developing one.

If you are not an expert in behavioral science, nor have the time to become one, but see the value in incorporating a behavioral plan into your practice, contact me to discuss more.