Make behavioral finance education a strategic business differentiator

Financial literacy

Create stronger relationships—and better potential outcomes—by helping clients avoid emotional money decisions.


In less than 18 months, your clients have experienced an equity market slump and periods of volatility, followed by a recovery, record setting gains for most indexes, then more moderate returns. Plus, your clients’ fixed income portfolios have been challenged by both negative yields and interest rate cuts.

In this relatively short span of time, your clients have likely also experienced a broad range of feelings, all the way from fear to relief and everywhere in between. Indeed, if markets and moods tend to move in the same direction, your clients may have been on an emotional roller coaster.

After everything they have recently been through, this may be an ideal time to discuss behavioral finance with your clients—including the effects that key principles of investor psychology may be having on your clients’ outlook and decision-making. For example:

  1. Hindsight bias may mean your clients are making decisions based on the latest information available.
  2. Illusion of control may mean your clients believe that their abilities, not external factors, were responsible for positive outcomes.
  3. Framing may mean your clients are processing information about the investment word based on context immediately around the information.

Taken together, these and other “money mind traps” may mean your clients could be emotionally ill-prepared for the next episode of economic uncertainty or market upheaval.

The flip side of the same coin says that educating clients now about behavioral finance basics, how to recognize any potential investor psychology short-comings that may be at work in their lives and what they can do to avoid missteps can both empower clients and create peace of mind. Teaching clients the fundamentals of investor psychology may also help your clients more clearly see your value to them professionally and personally.

The good news is, this opportunity should be pretty straightforward. As an experienced financial professional, the steps are likely part of your approach to client service. Here’s what you can do.

Talk to clients

You are well-positioned, as your clients’ trusted financial professional, to proactively introduce the subject, as well as to coach them through “teachable moments” when they arise. For example, sharing stories about common financial missteps can be an effective way to point out common “gotchas” they can steer clear of by understanding the predispositions many people have when it comes to finances.

This may include talking about another behavioral finance principal, loss aversion (or the preference to avoid losses compared to an equal opportunity for equal gain), that may cause investors to sell when markets are down, and therefore, lock in a potential loss and also miss out on potential asset growth during the subsequent recovery. And when the price of a security is going up, a fear of missing out may cause investors to buy at a peak, with little room for further asset appreciation, which can then become a position that is a drain on overall portfolio performance—if it, too, is not sold for a loss.

In terms of managing client expectations, time spent warning clients about how emotional reactions to market swings and helping them prepare for these ups and downs mentally may help prevent your clients from making costly mistakes. Many clients may appreciate your candor about the topic, as well.

Review risk tolerance

If you’ve ever taken a call from a nervous client, you probably understand that risk tolerance is more about client feelings than client thoughts; although thoughts are important and are often based in some way on feelings. By definition, feelings are subjective and how a client feels about risk can be influenced by recent experience.

Consistent with the loss aversion behavioral finance principle, clients may feel differently about risk when markets are down—and the feelings may be stronger than feelings about risk they may have described when markets are up. Additionally, the words financial industry professionals use to talk about risk tolerance may be unclear or abstract, especially to clients who do not share our financial industry knowledge and expertise.

Yet helping clients understand and articulate their risk tolerance is an essential part of doing business. It’s also not a “one and done” conversation topic, either, because as your clients’ lives change, it’s highly likely that their risk tolerance will change as well. These are all reasons why conversations about risk tolerance need to happen on a regular basis.

Allocate assets appropriately

Regardless of your business model, regulators are concerned that the investment products and services you provide are appropriate for each individual client and that your recommendations are in their best interests. Think of asset allocation as the “what” to the risk tolerance “why.” This is the daily work you do for your clients and a strong suit where many professionals excel. Rebalancing regularly can help your clients’ portfolios stay consistent with their given feelings about risk.

In terms of behavioral finance, having asset allocations carefully aligned with client risk tolerance will help you reassure clients that their portfolio is always structured appropriately—regardless of what is going on in the markets or the broader economy.

Focus on goals

If you have not already, consider shifting the focus of your business from delivering investment advice and solutions to providing holistic goals-based wealth planning services. You likely already talk to clients about their goals as part of your process. By making client goals the central topic of conversation (instead of focusing all the attention on what is in their portfolio) clients are more likely to see the value of your services because they relate to their goals on a deeply personal level.

Plus, goals-based planners may be better attuned to their clients changing circumstances and thus, better able to adjust portfolios as life unfolds for their clients. For these reasons, goals-based planners tend to manage more of their clients’ assets and tend to receive more business referrals from their clients.

Regarding behavioral finance, when your clients have concerns of some kind, being able to frame portfolio conversations around their ability to achieve shorter- and longer-term goals can be much more comforting and reassuring to them than comparing assets and balances to arbitrary models and indexes that do not provide the personal context that your clients’ own unique goals furnish so effectively.

Maintain sufficient liquidity

To help your clients prepare for financial emergencies—and for unexpected opportunities—you could put your clients into cash and cash equivalents.1 This may help them avoid the temptation to liquidate assets at an inopportune time when markets are down. But with two and three decade retirements now becoming the norm, the opportunity cost for this wealth preservation approach may have lasting consequences.

The good news is that your clients’ portfolios may offer an untapped source of liquidity for life’s surprises. But first you and your clients may need to think differently about borrowing.2

By pledging eligible assets as loan collateral, a securities-based line of credit offers a strategic solution that provides fast access to cash with advantageous terms. It may sound counterintuitive, but you can even use a securities-based line of credit to help reduce your clients’ overall risk exposure. And your clients can gain portfolio liquidity to fulfill their short-term financing needs without selling securities. This may allow client assets to continue working toward their long-term investment goals.

Like all investing decisions, there are risks to consider. For example, the pledged assets will be required to maintain a certain value, below which deposits of additional assets or money be required. Pledged assets may also be sold to satisfy some or all of the loan amount. This may lead to taxes and fees which the client will be responsible for paying.

Be sure you understand these and other risks and consider making a loan repayment plan a part of any recommendation to clients regarding securities-based lending. Should you wish to open a securities-based line of credit for your clients, RBC Clearing & Custody can make this process straightforward for you and your clients. 

Start the conversation today

One of your primary responsibilities as your clients’ professional financial professional is to help them make well-informed decisions. And as you may know, a variety of behavioral finance issues may affect the way your clients think about, and act with, their money. After all, they are only human. So the time you spend today helping clients understand their own psychology when it comes to investing may help create better client-professional experiences—and possibly better financial outcomes—whenever your clients’ emotions play a role in their portfolio choices.

1How to help clients prepare for a financial emergency. Retrieved from
2Grow your business with liquidity strategies. Retrieved from

Asset-based lending may not be suitable for all investors. Investors must maintain sufficient collateral to support outstanding loans. Before using such products, investors should read the Margin Disclosure Statement or line of credit literature and regulatory disclosures to ensure the risks involved are understood.

Lending services are offered by different entities to investors served by financial professionals and firms who do business with RBC Clearing & Custody. The financial professional and/or firm may receive compensation in conjunction with offering or referring these services.

RBC Clearing & Custody is not a bank. Where appropriate RBC Capital Markets, LLC, has entered into agreements with the Royal Bank of Canada to help facilitate and service lines of credit. RBC Capital Markets, LLC and its affiliates and their employees do not provide tax or legal advice. All decisions regarding the tax or legal implications of investments should be made in connection with an independent tax or legal advisor.

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