In his poem “If,” Rudyard Kipling waxed poetic about “keep(ing) your head when all about you are losing theirs and blaming it on you.” For financial advisors, there are no ifs, ands or buts about it: from tariffs and geopolitical unrest to interest rate drama and a U.S. government shutdown, this year will be remembered as an eventful one. One lingering – and positive – impact from this rough and tumble 2025 has been the increased use of behavioral finance techniques by financial advisors.
While not unprecedented, this year’s uncertainty has created stressors throughout the wealth management ecosystem on both sides of the advisor-client relationship. At some points, investors were anxious, frightened and clamoring for guidance and reassurance from their advisors. Of course, financial advisors rose to the occasion admirably – and continue to do so. While there’s an art to helping clients navigate challenging market environments, there’s a science behind it as well.
Behavioral finance seeks to uncover – and help mitigate – the biases, emotions and social pressures that drive irrational investor decisions. Financial professionals using its concepts to better understand the fears investors contend with are better able to strengthen their client relationships and perhaps optimize outcomes in volatile markets.
For clients, behavioral finance strategies help them to better understand themselves and what drives their financial decision making. Three financial professionals familiar with behavioral finance theory spoke to us about its importance and the benefits it has had on their businesses and their clients.
- Michelle Buria, Managing Director, Wealth Management, Choreo, an RIA that provides investment advice, financial planning and other services to individuals and businesses
- Matthew Gaffey, President, Corbett Road Wealth Management, an RIA based in McLean, Virginia
- Sheila Little, Wealth Advisor, Perigon Wealth Management, an advisor-led, independent wealth management firm with offices across the country
Buria: As financial planning has become more prevalent, the incorporation of client behavior has evolved. At the onset, the buy low/sell high concept, which is still viable, was the extent of managing client emotion. The advancement of technology and the sheer amount of information available at every moment have consumers more engaged in their financial lives. This awareness is heightened by the steady stream of content which could impact consumers’ decisions.
When making decisions, consumers tend to focus on the immediate result, based on current conditions. An issue or feeling can be resolved, but financial planning is translating those decisions to also illustrate the effect in the future. Without planning, market volatility can create strong emotional biases leading to poor long-term decisions.
Financial planning is most effective through informed choices. Advisors who acknowledge and can empathize with client emotions have the ability to build trust, aiding in stronger conversations and better financial outcomes.
Gaffey: During time periods where we’re experiencing a steady market, we remind people of where the market has been and dig deeper into how past events made them feel. If the market has had a good run, it’s easy for many to forget the details of past market declines and start to talk themselves into being able to stomach more risk.
Getting a bigger return on your money sounds great until you experience a downward swing, realize you’ve been punching way above your weight class and can’t stomach the volatility. To combat this, we talk about incorporating tactical strategies or buffered solutions into your portfolio in order to help plan for the certainty of uncertainty. These types of strategies afford someone the opportunity to mitigate risks during market declines, provide them with more confidence and discipline, and create behavioral alpha as a result.
In volatile markets, you remind people, “If you’re in it for a penny, you’re in it for a pound.” One of the easiest ways to compound the problems of a negative market environment is to take losses on the chin in an allocation that, in hindsight, is more aggressive than you would like, become significantly more conservative as a result, and then watch the market recover relatively soon thereafter.
Little: It is perfectly normal for clients to worry about how economic and geopolitical uncertainty will impact their personal investments. Addressing their concerns head-on with emotionally intelligent, honest conversations is perhaps the most important practice that we as financial advisors can employ. We can do this by acknowledging what is in our control, such as planning and setting savings goals. Reminding them that there is always uncertainty is also key. As the old saying goes, advisors can’t peer into a crystal ball and predict the future, but we can walk with our clients through discomfort and give them reassurance.
I remind clients that we are following a customized plan that is regularly tested and equipped to operate within a range of probability. I support our clients well in advance of realizing goals (i.e., sending a child to college, buying a house, or retiring) through scenario planning, portfolio adjustments and conversations that identify areas of importance, specific worries and unique circumstances.
Behavioral finance was once merely seen as an academic curiosity: interesting research about why people make irrational money decisions, but not central to financial planning. Traditionally, advisors relied on data, models and the assumption that clients acted rationally. Such practices, however, began to shift over time. The market crisis of 2008 revealed the ways in which emotions influence investor behavior, and this in turn lent more credence to behavioral finance as a practical approach to advising.
In response, our firm developed a goal-focused planning method that addresses the gap between rational markets and irrational decision making. It was admittedly not an easy shift for our established clients, who were focused primarily on returns and hard numbers, but over time, this skepticism was replaced with a greater understanding and appreciation.
Today, advisors are using behavioral finance in practical ways, such as understanding client biases, building trust and helping people stick with long-term plans. What was once dismissed as “soft science” is now viewed as an essential tool for improving both financial decisions and advisor-client relationships.
Janeesa Hollingshead, Contributing Editor at Wealth Solutions Report, can be reached at editor@wealthsolutionsreport.com.
