- 3-Minute Article
- Aug 28, 2017
How Framing Influences Your Clients’ Financial Decisions
Professor Victor Ricciardi explains how framing can help your clients understand the benefits and risks of financial products.
Framing is an example of a bias — a natural, built-in tendency we all have that influences how we make decisions. It is one of the strongest biases to affect decision making and can have a major impact on how receptive a client is to your financial guidance.
THE FRAMING EFFECT
What it is
- The framing effect is a cognitive bias that influences how we react to a choice depending on how it is presented to us.
How it works
- Framing comes into play when a person allows emotions and personal perceptions to influence the choices they make, rather than making a rational decision based solely on the available factual information.
- The framing effect becomes more influential as we grow older.1
How you frame a conversation with a client can affect how they respond to your guidance and whether or not they engage with, or understand, the subject you are discussing.
Focus on positive outcomes
Human beings tend to focus more on their spending needs today than saving for future needs like retirement.2 You can help your client engage with long-term future goals by focusing on the positive outcomes and talking in terms of enabling their future lifestyle and ambitions.
For example, research has found that clients are less receptive to a product like an annuity when it is discussed in terms of receiving a guaranteed monthly income. Clients tended to find this information unimportant or even uninteresting, and were less likely to purchase an annuity as a result.3 But when the conversation was framed around spending money and enabling positive activities in retirement, research found that clients were more likely to include an annuity in their financial plans.4
Find out how your clients feel
Even relatively familiar terms can be problematic, because they contain a hidden emotional component for some clients. Explore how your client feels about a financial product or service by framing the conversation in emotional terms.
For example, I have found in my own research that the word risk has a significant emotional component for some investors. I conducted a research study that asked individuals what asset classes they believed to be more risky: stocks or bonds? In the survey question I substituted the word risk and replaced it with worry. I found that a majority of clients (70% of the sample) associate the phrase worry with common stocks, compared to a small minority (10% of the sample) for bonds.5
Avoid using technical language and industry jargon
Many clients feel they don’t have enough knowledge of financial matters, which can leave them feeling overwhelmed. As an advisor, you can help reframe or avoid negative perceptions by using relatable, everyday language whenever possible and keeping the use of financial terms and industry jargon to a minimum.
For example, when discussing volatility, many financial advisors rely on technical terms, like beta. The beta concept is complex and requires other complex concepts like systemic risk and regression analysis to fully understand. But in everyday language, it can be described quite simply as a way of measuring how much an investment’s value moves up and down compared to the rest of the market.
Improving your clients’ decision making takes time, patience, and commitment. If you want to help them understand their own decision making, it is vital to start by building strong, long-term relationships with your clients based on trust.