If you speak to anyone in a client-facing financial services role you will inevitably hear about the frustration and mystification that comes with dealing with what seem to be irrational customers. When your role is to help your clients make sound financial decisions—be it regarding retirement, refinancing a home or even just opening a savings account—it can be challenging to present the best possible solution only to have them turn it down.
Do they not get it? Are they just bad with money? Is it you? If you find yourself asking these questions, keep one thing in mind: your customers are human, and you must interact with them as such. By understanding the mental biases that affect financial decision making and how they overlap with the stages of the buyer’s journey, you can offer content that provides the most value to your customer, helping them to make the best possible decision.
Behavioral finance combines cognitive psychology and economics to provide explanations as to why people make irrational financial decisions. It is most commonly applied to investments, but it is relevant across all financial decisions. Some of the most common mental biases that cause us to see fallout in the financial buyer’s journey include loss aversion, confirmation bias, and mental accounting. Let’s take a look at where these come into play across the buyer’s journey and how your messaging can help.
Stage: Problem Recognition
Bias: Mental Accounting
This is the stage I hear the most complaints about from financial services professionals. My customers must not get it—if they truly understood their current situation, they would want to fix it! They must not recognize the problem!
Mental accounting is a cognitive process in which individualize bucket-ize their finances by source of income or their intent for the account, rather than taking a holistic view of their financial health. This is detrimental in most cases, such as those who view their savings accounts and their credit card debt to be completely independent of one another and end up accruing interest on their debt at a rate that their savings cannot compensate for. Mental accounting presents a challenge in the problem recognition stage because customers sometimes fail to see the overall problem due to their prioritization of their different financial buckets.
Let’s look at a fictional client, Trevor, who has mentally bucket-ized his finances. This has been beneficial for his savings and kids’ college funds, but detrimental to his credit card debt, as he views his debt and his savings to be independent of each other. His primary concerns are having enough money should he be laid off and sending his kids to college. He therefore saves money into his different accounts, but his credit score is low, and he is not making any progress toward reducing his debt. This will ultimately affect his retirement goals, which is a significant problem regardless of whether he can mentally see it.
What You Can Do
Understand the job the customer is trying to do and speak to him in his language.
Financial decisions are both highly functional and highly emotional for consumers and must be approached from both angles. As a financial services professional, it can be easy to see a customer’s functional needs:
- Will they be able to retire comfortably and on time?
- Can they afford to send their children to college?
- Do they have the best possible rate on their mortgage?
But each functional component fulfills emotional needs, as well, and is prioritized differently between customers. You must understand what “job” your customer is trying to complete and the context in which he is looking for a solution. This can help you understand the customer’s emotional priorities and allow you to solve for his primary job first, rather than the functional problem you want him to solve.
For example, perhaps Trevor fears losing his job and therefore prefers to stockpile money in his savings account to fall back on. This may explain why he insists on keeping his savings account full while carrying a large credit card balance. The job he is trying to fulfill is making sure he and his family have enough money to live off for a few months should he find himself without an income. Help him to determine a reasonable amount to keep in savings based on his current income and expenses, and you will have helped to complete his emotional job. Then, you have a platform on which to help him build his financial health holistically.
About the Author
Kylie is an innovative, goal-oriented Marketing Segment Manager for Financial Services. She has over five years of marketing experience in financial services, mental health and recruiting. She enjoys the unique challenges of financial services marketing, including compliance and regulatory requirements and the ever-evolving technological advancements. Kylie has a BA and BS from Arizona state and has completed several graduate-level courses in marketing and finance. Fun fact: Kylie grew up in her dad’s insurance office and recently married a financial advisor—she just can’t get away from the industry!More Content by Kylie Peters