This post first appeared on Morningstar Blog.
As a financial adviser, your job starts by forming relationships with your clients. This involves understanding their current financial picture, long-term goals, and day-to-day needs. But it also includes getting to know your clients on a psychological level. You can gain important insights by understanding their behavioral tendencies. For instance, which clients want to chase after every hot stock? What about those who want to sell a winning investment right when the numbers take a positive turn?
At Morningstar, we created a guide called “Simple but Not Easy” to help advisers incorporate behavioral science in their practice. In our guide, we provide a tool that you can use to assess your client’s financial type. It can help you understand a client’s money mindset and how you can adapt your practice to better serve his or her personal needs.
What’s the money mindset of your clients?
Every adviser knows that even the best laid plans can be destroyed if your client succumbs to behavioral mistakes. Having a better grasp on the person’s money mindset and behavioral tendencies can help you provide better financial guidance.
Several psychological factors affect financial decision-making. The financial personality matrix that’s in our guide combines three of these factors into one easy-to-use framework. We’ve outlined them below:
3 factors that affect behavior and money mindset
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Time perception: Short-term thinkers feel time delays as more painful. People who think farther into the future, and who picture the future more clearly, tend to be more patient when making financial decisions.
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Locus of control: A person with an internal locus of control believes that they are in control of their own destiny. When it comes to their finances, these people tend to feel more peaceful and satisfied with their money, according to research from Morningstar behavioral economist Sarah Newcomb, Ph.D. Clients in this category may not need as much of your attention when markets are rocky. This can free up your time for clients who do.
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Emotional drivers: The emotional meanings we associate with money can have a profound impact on our spending and saving choices. The idea of great wealth can inspire feelings of excitement, desire, or anxiety. It’s important to know where your clients fall on this spectrum, so you can better understand how to help them enjoy their wealth while maintaining financial security.
A path forward for advisers
These are just three factors that contribute to the money mindset of your clients. By understanding this money mindset, you can adapt your financial advice to your clients' behavioral needs and coach them toward healthier financial attitudes and behaviors over time.