Financial advisors are taking emotions into account when managing money.

• The study of behavioral economics blends the disciplines of economics and psychology to comprehend how individuals make financial choices.
• "The ideal investment is not always the one with the highest long-term rate of return, but rather the one that our clients can maintain," stated a certified financial planner.
• Behavioral science can aid financial advisors in comprehending individuals' emotions and assist them in making better decisions, although it does not constitute therapy.

With the advent of new technologies, individuals now have greater access to financial information and tools to manage their money.

While robo-advisors can create and adjust portfolios according to customer preferences, they do not take into account individuals' emotional requirements.

Incorporating behavioral science into financial advisors' knowledge can improve client outcomes, according to experts.

Understanding behavioral science

The utilization of artificial intelligence tools by advisors is on the rise for repetitive tasks such as research, scheduling, and stock picking.

Understanding how people make financial decisions is becoming increasingly important to investment advisors, who are turning to behavioral science for insights. By combining the study of economics and psychology, behavioral economics provides a comprehensive understanding of the factors that influence financial decision-making.

"Certified financial planner Tim Mauer, chief advisory officer at SignatureFD, emphasized the importance of being more attentive to clients' emotions in order to provide better financial advice."

Mauer recommends a qualitative approach to managing a portfolio that reveals the individual's underlying purpose.

During a session at CNBC's FA Summit on Wednesday, Maurer stated that our planning is centered on the genuine human needs of our clients, rather than the tools and techniques we may employ to help them achieve their objectives.

According to Maurer, a member of the CNBC Financial Advisor Council, the best investment is not always the one with the highest long-term rate of return, but rather the one that clients can stick with.

Connecting to the human

By controlling emotions, individuals can navigate volatile financial markets and follow Warren Buffett's advice to "fear the greedy and be greedy when others are fearful."

Although AI can suggest alternative ways of explaining financial strategies, it lacks the ability to connect with people.

""Giving great advice may not always be effective, but being vulnerable and communicating it effectively can lead to creative problem-solving. However, there is no AI that can do this for you," said Sam G. Huszczo, a CFP and founder of SGH Wealth Management near Detroit."

Don't confuse behavioral science with financial therapy

Behavioral science can aid financial advisors in comprehending individuals' emotions and assist them in making better decisions, although it does not constitute therapy.

"Maurer explained that financial therapy involves analyzing a situation that is unresolvable and working with a therapist who specializes in finance to identify the root cause of the behavior."

Financial therapy explores underlying problems that hinder individuals from achieving their financial objectives.

Ashley Agnew, president of the Financial Therapy Association, stated that a financial therapist can help individuals understand their relationship with money and the reasons behind their financial decisions, ultimately leading to better financial planning and goal achievement.

In therapy sessions, they unpacked the client's feelings about selling his family business to fund his retirement. He revealed that the business was the only thing his father had praised, and they dug deep into his emotions to help him move forward.

Agnew, a director at Centerpoint Advisors in Needham, Massachusetts, said, "It makes a little bit more sense once you get to that."

If clients' financial issues become too complex and involve matters like abuse, financial therapists may recommend seeking the help of licensed mental health counselors.