Behavioral Financial Advisors
Behavioral financial advisors incorporate individual psychology in their financial planning recommendations to help clients overcome cognitive and behavioral biases that negatively impact their financial decisions. A BFA seeks to help clients achieve better financial outcomes by addressing these emotions and biases.
- Written By Brandon Renfro, Ph.D., CFP®, RICP®, EA
Brandon Renfro, Ph.D., CFP®, RICP®, EA
As a Certified Financial Planner™ professional and Retired Income Certified Professional®, Brandon Renfro is well-versed in the financial information and strategies needed to meet retirement goals. In addition to co-owning Belonging Wealth Management and assisting clients, Brandon writes regularly for financial publications.Read More
- Edited BySavannah Hanson
Senior Financial Editor
Savannah Hanson is an accomplished writer, editor and content marketer. She joined Annuity.org as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.Read More
- Financially Reviewed ByThomas J. Brock, CFA®, CPA
Thomas J. Brock, CFA®, CPA
Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.Read More
- Updated: March 22, 2023
- 6 min read time
- This page features 2 Cited Research Articles
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- The field of behavioral finance recognizes that people are not always rational, but are often influenced by cognitive and emotional biases that may cause them to make less-than-optimal choices with their money.
- Behavioral financial advisors incorporate the principles of behavioral finance into the advice they provide to their clients and seek to help them make better decisions.
- The Behavioral Financial Advisor designation curriculum educates advisors on the various biases that influence financial behaviors and how to incorporate them into client plans and guidance.
What Is a Behavioral Financial Advisor?
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.
Goals-based investing is a popular way to overcome behavioral biases when investing. Fundamentally, it entails segmenting your invested assets into “buckets” designed to achieve different time-based objectives, such are near-term, intermediate-term and long-term.
How Behavioral Financial Advisors Work With Investors
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.
Psychological Impact on Finances
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.
- Sunk Cost Fallacy
- This occurs when people choose to invest more money in a poor investment simply because of prior investments they have already made instead of evaluating the investment on its merits alone.
- Status Quo Bias
- Investors may choose not to act — maintain the status quo — when they face a set of complex choices. When they fail to act, investors sometimes prolong their current situation.
- Confirmation Bias
- This is a tendency to seek information that confirms a currently held belief, rather than looking for objective information that helps make a more informed decision.
- The first number or value presented sometimes influences a client’s expectation. This can occur even if that first number is irrelevant or unrelated to the issue at hand.
- Endowment Effect
- Letting go of something we already own often feels like a loss. People tend to value things more highly when they own them. This could psychologically lead an investor to hold on to an investment for longer than they objectively should.
What To Look For in a Behavioral Financial Advisor
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.
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2 Cited Research Articles
Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.
- Think2Perform. (2023). BFA Program Overview. Retrieved from https://knowledgelinktv.com/think2perform/program-preview/
- FINRA.org. (2023, February). BFA. Retrieved from https://www.finra.org/investors/professional-designations/bfa
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