It has been an unusual year since 2020. The global pandemic, economic uncertainty, imbalanced sector performance and sudden surge in market indices have wreaked havoc on investor activity.
As there has been a lot of fluctuations in investor activity it is important to understand the drivers behind it. Behavioral science can help advisors with insight into opportunities to impact investor behavior.
One way the investor behaviour can be controlled is through messages by their advisors. Dozens of behavioral science studies have demonstrated how the content of the message can intervene in the process to influence behavior.
A whitepaper by Fidelity Investments lists nine factors that influence investor behavior and how to tone down investor behaviour with appropriate messages.
Advisors can frame messages in the context of encouraging prospects/clients to engage with advisors in decision making. These examples are relevant during significant life events, including the tumult of a global pandemic.
Anxiety - An uncomfortable emotional state based in fear, nervousness, or uncertainty
Sample message advisors can send: “Worried about market volatility? Get ahead of your concerns: Reach out to your advisor for a comprehensive review.”
Cognitive Dissonance - The mental discomfort that arises from having conflicting beliefs or attitudes
Sample message: “Ignoring your progress toward financial goals may seem comfortable during tumultuous times, but working with your financial advisor can provide you with the peace of mind you crave.”
Confirmation Bias - Accepting new information or opinions to confirm a personal viewpoint, and ignoring opposing opinions
Sample message: Before making a significant change in your portfolio, it may help to ask yourself whether you are certain the decision works in your best financial interest. Reach out to your advisor to review the pros and cons before making a final decision.”
Dynamic Social Norm - A tendency to adhere to perceived social rules based on how the behavior of others changes over time
Sample message: “During the pandemic, more and more clients are meeting with their advisor to assess their financial plan. Schedule your review today.”
Loss Aversion - A preference to avoid a loss in lieu of a gain of an equivalent amount
Sample message: “In times of market volatility, it may be tempting to abandon your financial plan. Think twice before making a decision that may inadvertently incur a loss. Contact your financial advisor for the latest market insights.”
Overconfidence Bias - An overestimation of abilities or results
Sample message: “It’s better to gather the information you need to make an informed decision. Reach out to your financial advisor to set up a review session before major decisions.”
Regret Aversion - A fear of making poor decisions
Sample message: “Is your portfolio missing out on some of the fantastic gains seen in the market over this period? Reach out to your financial advisor to learn if there is an opportunity to rebalance.”
Relatedness - The recognition that a behavior can bring them closer to the people they love, or help to support them
Sample message: The pandemic has caused many families to start talking about long-term care for their loved ones. Your financial advisor can help you navigate what’s best for you and your family.”
Self-Efficacy - A belief in their personal ability to effectively engage in a target behavior
Sample message: “Market instability is not easy, but you are able to weather this storm. Reach out to your advisor to talk through your decisions.”
