As the financial services industry has evolved away from transactions and toward financial planning, an interesting shift has happened: more couples have started showing up in advisors’ offices to discuss their investments and their financial plan. Now that there are two people in the room, advisors struggle when deciding which one to talk to.
We are long past the day when men controlled a couple’s financial affairs. Today, many women are the primary earners, with men taking a back seat in financial decision-making. We also see more unmarried partners who choose to keep their finances separate. These trends have had a major impact on client relationship management. Advisors now need a strategy for communicating with two distinct decision-makers. Those who don’t have such a strategy sabotage their ability to get and keep good clients.
Behavioral Economics Reveals an Even More Substantial Challenge
To complicate matters further, not only are there two people who are making the financial decisions, there are also two distinct decision-making systems in play.
In his book, Thinking, Fast and Slow, Daniel Kahneman synthesized four decades of research into a simple observation: the human brain uses two distinct decision-making systems, System One and System Two, to navigate the world. System Two represents the rational mind that uses logic and language to process information, make predictions and solve problems. This system equips human beings to think through issues and make rational, non-emotional decisions. It’s the driver behind the scientific method—and civilization itself.
System Two uses a lot of energy to deal with information and is easily fatigued. When faced with danger, complications or fatigue, System Two shuts down and turns things over to a different process. Kahneman calls this process System One because it is far more influential in human decision-making. In many situations, a person automatically shifts from System Two to System One quickly, and without noticing.
System One is a huge cluster of mental shortcuts called “heuristics.” These heuristics are formulas that have evolved in the human brain over millions of years to speed decision-making when an individual is faced with survival challenges. Behavioral economics research has quantified 188 different heuristics that are common among humans.
The implications of this are staggering: even when there is only one person in the room there are two mental systems present. These systems control the way the client makes sense of the world and decides how to react. Although both systems try to help us survive and prosper, they don’t communicate with each other. And they operate in vastly different ways. Importantly, System Two is far more fragile and is likely to shut down in the presence of challenges. Most of the time, System One is running the show.
How to Avoid Sabotaging Your Practice
The key insight here is that advisors tend to use System Two almost exclusively to make sense of the capital markets, portfolio construction and investment selection. They approach clients as rational, robotic decision-makers who use data and logic to navigate their investments, and they prepare reviews and direct conversations to a client’s System Two. The result? Advisors are often caught by surprise when a client shifts into System One and becomes impulsive, emotional and unable to understand what the advisor is saying.
This is especially true when markets are volatile because volatility stimulates System One. In this situation, a loss-aversion heuristic is automatically activated. This heuristic causes the client to feel the pain of loss much more deeply than the pleasure of a similar gain. System One also tends to project current, negative trends into the future. This inappropriate extrapolation is likely to magnify a client’s distress when markets correct.
Just as ignoring the other person in the room sabotages a practice, so does ignoring the other System in the room. When clients are activated by fears or confusion, they shift to System One. The prudent advisor shifts as well and helps re-activate the client’s logical thinking resources.
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