Behavioral Financial Advisors

There isn’t a strict definition of what constitutes financial advice. In practice, investment recommendations are often at the center of most financial plans, although they also incorporate elements like budgeting, estate planning, insurance and tax planning. Behavioral financial advisors use their unique training to fold cognitive and emotional factors into this guidance.

A financial advisor generally gives clients their views on which financial instruments would help the client achieve their financial goals. This advice has traditionally been based on quantitative factors such as an investment’s expected return or how much a client may need to accumulate by a certain time (like retirement). Advisors often present financial plans as data in tables, charts or graphs.

Classic financial and economic theory assumes that most people are rational and make choices based on an idea called utility maximization. Financial advisors traditionally provide recommendations based on the same assumption that clients will rationally use the information in those spreadsheets, charts and graphs to make their decisions.

While numbers are still a core component of a modern financial plan, the field has evolved to include more than just math. Today, many financial advisors recognize that people have different cognitive biases or emotional influences that may be causing them to make decisions that don’t lead to the best financial outcomes. In other words, they are not always completely rational.

Rather than ignore these biases, behavioral financial advisors are specifically trained to recognize their influence. By incorporating them into their advice and recommendations, BFAs can help clients make better decisions and achieve better outcomes.

Working with a behavioral financial advisor can help someone improve their financial situation by recognizing and addressing the way emotions and biases influence their decisions or impact the choices they make.

Because they are trained to recognize psychological and emotional biases that may impact the way someone engages with their money, BFAs can provide targeted advice customized to an individual client’s unique personality.

Behavioral finance advisors often perform many of the same tasks and provide similar services as other types of financial advisors. But specific training or education regarding client psychology distinguishes behavioral financial advisors, and they expressly include that training as a key element of their planning process.

Behavioral financial advisors improve their clients’ day-to-day financial decisions by helping them understand their attitudes toward money and how they may be influenced by certain psychological factors. BFAs use this knowledge to help clients overcome their financial challenges and allow them to make better-informed decisions that keep them on track to achieving their goals.

Behavioral finance recognizes that there are certain biases that affect people’s ability to make optimal choices and that people often simplify their decisions with the use of heuristics, or mental shortcuts. Behavioral financial advisors will try to identify which of these is affecting a client so they can tailor their recommendations and guidance.

Before choosing to work with any financial professional, including a behavioral financial advisor, it’s important to do your research to make sure they are the right advisor for you.

Important considerations as you search for an advisor include their education, experience and practice focus. Many advisors work with a specific type of client. For example, an advisor may work primarily with independent contractors, employees of a specific company or young newlyweds. These specialists are more likely to have a deeper understanding of the types of issues their clients deal with and may provide better advice because of it.

Check to see if they are a member of any professional organizations and visit the organization’s website to understand what they are about. Many professional organizations require members to adhere to specific standards for professionalism, education or ethics. Take the time to interview the potential advisor about their background. Ask direct questions to make sure they can provide the type of help you are looking for and that you are comfortable with them.

Training and education matter, too. An advisor that incorporates behavioral finance into their advice may have a designation such as the Behavioral Financial Advice program certification.

To earn the Behavioral Financial Advice designation, an advisor must complete a two-course program of study and pass a final exam.

The courses are self-paced and will generally take an advisor 20-30 hours to complete. The final exam consists of 100 multiple-choice questions and two case studies. To receive a passing grade and earn the BFA designation, an individual must score at least an 80%.

Maintaining the BFA certification requires an advisor to complete a minimum of 20 continuing education hours every two years.