9 ways emotions matter in client relationships

Behavioral scientists and economists have long known that people are not always "rational economic actors." Yes, this applies even to well-informed, well-intended investors. "Personal finance is more personal than finance," says Tim Maurer, Head of Wealth Management at Triad Financial Advisors.

Maurer regularly uses nine concepts from behavioral psychology that he believes can help advisors better understand their clients and what they want.

1. Emotional thinking sprints ahead of rational thinking

Emotional thinking is intuitive and fast. Sometimes we call this our gut instinct. Logic is slower and more deliberate. According to social psychologist Daniel Kahneman, author of the book Thinking, Fast and Slow, while we'd prefer to approach important financial decisions rationally, the majority of those decisions are made emotionally. In fact, our rational brains often play the role of "hype man," coming up with reasons to justify our emotional decisions.

2. The emotional elephant always trumps the logical rider

Illustration of man riding elephant between signs that say emotions and logic

Consider the metaphor of an elephant and its rider. In The Happiness Hypothesis, Jonathan Haidt suggests that we think of emotions as an elephant and logic as the rider. When the two come into conflict, the larger, stronger elephant always wins. Maurer points out some real-life examples, such as the mother who continues to pay her daughter's exorbitant credit card bill or the nervous investor who cashes out every time markets reach new highs.

3. Advisors must speak emotion fluently

Advisors have to be fluent in the ideas and the language of finance. But that's not the language of most clients. Advisors need to know how to "speak elephant" to their clients. Lighting the Torch, by George Kinder and Susan Galvan, sheds light on just how central client emotions are to the financial planning process and—more importantly—how to work with them. According to Maurer, this might mean talking less about rates of return and asset accumulation and more about a client's dreams or life goals and coming up with a financial strategy to achieve them.

4. The elephant is a meaningful part of the solution

Illustration of a woman riding an elephant and picking an apple from a tree

Maurer warns that many right-brained advisors may write off the moody elephant as a problem. However, in their book Switch, Chip and Dan Heath detail the tremendous strengths of the instinctual elephant that can help overcome some of the rider's crippling weaknesses, such as the analysis paralysis that can happen when a client has too many investment options. Maurer suggests that to harness the quick-thinking power of gut instincts, make sure that the elephant doesn't get worn out. Simplify everything you can about the client experience. Take care of the small details to free up important decision-making space.

5. Sometimes it's impossible to act without intuition

There are many situations in which the logical part of the brain just doesn't perform well. In his book Blink, Malcom Gladwell gives many examples from real life, such as the art expert who spotted a fake statue in seconds after museum antiquities experts failed for months to see it. Maurer looks to baseball for another example. "Kids are taught to keep their eye on the ball when they bat. But the eye can't follow a 95-mile-per-hour fastball. Big league hitters hit them because they train their instincts to do what the slower part of the brain cannot."

6. Be aware of the endowment effect

People tend to overvalue what they own and undervalue what they don't. This is called the endowment effect and it's the basic force behind risk aversion. People feel more pain from a loss than pleasure from a gain, so they're more likely to avoid losses than pursue gains. Richard Thaler and Cass Sunstein, in their book Nudge, point to automatic 401(k) enrollment as a way to work around the endowment effect. Participation rates in employee-sponsored retirement plans were low because distant gains were hard to justify in the face of near-term losses. But when auto opt-ins were introduced—and emotional decision-making removed—participation rates climbed roughly 80%.

Illustration of various people on stacks of coins and one person holding three coins

7. It needs to be their decision

People are more driven by intrinsic motivation than by a carrot or a stick. In his book Drive, Daniel Pink provides a primer on the science of motivation and how true motivation comes through autonomy, mastery, and purpose—not from someone prodding you to act. Because people respond more positively and enthusiastically when they feel they have autonomy and choice, Maurer says that advisors should reframe their client recommendations as "you can" rather than "you should."

8. What to do and how to go about it are rooted in why

Taking inspiration from Simon Sinek's classic TED talk "Start With Why," Maurer encourages advisors to focus their time on their clients' "why"—the values and goals behind their investments. When advisors tie the client's why to their recommendations, clients feel that their decision has purpose. When times get hard, they're more likely to stick with that decision because it means something to them. 

9. Bad habits can be transformed

Every habit follows the same structure—a habit loop—according to Charles Duhigg. In his book The Power of Habit, Duhigg explains that behind every habit is a cue that triggers a routine that leads to a reward. Because of this universal structure, any habit can be changed. Simply keep the cue and the reward but change the routine. The practical application for advisors, according to Maurer, is to build good habit loops using defaults. For example, when clients get their standard cost-of-living raises each year (cue), ask them to automatically increase the amount they're putting toward their 401(k) (change in routine). They'll then feel good knowing they put their money to work (reward).

What you can do next

  • Consider a custodian that invests in your success. If you're thinking about becoming an independent advisor, contact us to learn more about the benefits of a Schwab custodial relationship.


Information in this article is based on Tim Maurer's November 17, 2017, presentation at IMPACT titled, "Behavioral Finance: The Science of Client Motivation."

For informational purposes only. Third party trademarks are the property of their respective owners and used with permission. Third party firms and their employees are not affiliated with or an employee of Schwab.

Information included on this site is intended to be an overview and is subject to change. Experiences expressed by advisors may not be representative of the experience of other advisors and are not a guarantee of future success.

© 2018 Charles Schwab & Co., Inc. ("Schwab") All rights reserved. Member SIPC