Financial advisers should ensure they take clients’ emotions into account when giving advice, the director of behavioural science at Morningstar has said.
Sarah Newcomb said at the firm’s investment conference last week (June 29), that all major financial decisions are emotional events.
“What we do with our money translates into what we do in our life and whether or not we realise our hopes and dreams. And so there are emotional trade offs in every financial decision,” she said.
“[It is important] to understand why someone might look at a financial tradeoff and say, ’it’s not really for me’, and understand what’s happening emotionally so you can find the right approach for [your client].”
She added it was important for advisers to adjust their thinking when it comes to financial advice, and go beyond the numbers.
“The goal here is not to turn people into robots that can just follow the maths. The goal here is to make the maths and the numbers support human thriving,” she said.
“We want to help people make financial decisions that really help them thrive both financially and emotionally.
“We don't want to ignore emotions, we also don't want to be entirely led by emotions.
“And so understanding when someone is being emotionally driven is good, so we can add some logic, and understanding when someone may be not taking emotion seriously enough is another thing we want to do.”
Newcomb encouraged advisers to think holistically about what money means, and has meant in the past to clients.
“Money means a lot of things to people, it means security, power, stress, safety, success. Depending on who you are, and how you've experienced life up to this point, you may have very different feelings about what money is and what money represents in your life.
“This will affect how you feel about different emotional, and financial trade offs. So people's beliefs about money itself will definitely affect how they feel about different financial decisions.”
She added advisers should focus on clients’ needs first and then find a way to get the numbers to support the needs.
“Emotions are very present and we need to give them the respect they deserve.
“Numbers do not trump fundamental human needs.”