Advisor tech gets a behavioral boost, embedding the science of psychology into everyday workflows and tools
To bridge the ‘behavior gap’ and improve investor outcomes, Orion Advisor Solutions is embedding behavioral finance into its award-winning wealthtech platform.
Orion will infuse academic research and behavioral psychology into the technology advisors use every day, including risk profiling and financial planning proposal tools. The first step of this fusion is a new 3D Risk Profile which adds depth to the risk tolerance questionnaire (RTQ) by measuring a third dimension of ‘composure’ in addition to traditional measurements of ‘tolerance’ and ‘capacity.’ The goal is to help advisors deliver stand-out service, gain more client insights, and help investors recognize the emotions and triggers that can derail long-term goals.
It’s been proven that investors make bad decisions under stress. Buying and selling at the wrong time can wreck investor returns. When the market bottomed in March 2020, 1 out 5 investors sold all of their stocks, only to miss out on one of the fastest developing and largest bull markets just a few weeks later.1 The value of behavioral coaching can make a big difference in closing the behavior gap, which measures the loss an average investor incurs as a result of emotional responses to market conditions. Studies have shown that this gap can range from 1.17% to 5.35% per annum.2
“We want advisors and investors to understand each other through every stage of the advisor-client journey. That understanding is the root of reassurance and peace of mind that drives better relationships, better outcomes, and endures growth,” said Eric Clarke, Chief Executive Officer, Orion Advisor Solutions. “Using technology to augment human compassion and insight is the new frontier of fiduciary service, and we’ve only just begun to explore the possibilities.”
New RTQ Adds Behavioral Dimension to Better Predict Investors’ Emotional Reaction to Volatility
By integrating behavioral finance into the risk tolerance questionnaire, Orion aims to fundamentally transform one of the first advisor-client interactions. The addition of a ‘composure’ measurement focuses on the psychology behind a client’s decision. The resulting 3D Risk Profile creates new opportunities for advisors to better tailor portfolios based on a clients’ true risk tolerance, ensuring alignment with asset allocation recommendations, individual goals, and their ability to stay the course.
Orion’s 3D Risk Profile tool will start with a standard questionnaire to assess an investor’s risk ‘capacity’ or their ability to take on risk based on age, level of wealth, and financial understanding. The tool will also measure ‘tolerance’ or willingness to take on more risk for greater reward. The addition of risk ‘composure’ measures a client’s tendency to be anxious about volatility and provides key insight into their expected behaviors during periods of market elation or stress. Those with a high composure score remain calm in market volatility, while those with lower levels of composure may be more easily rattled.
A more complete understanding of client behavior is a proven catalyst for growth. Since the 1980s, awareness and application of behavioral finance has grown year-over-year. In fact, 81% of advisors report using behavioral finance techniques—and, of those advisors, 62% added new clients twice as fast as those who did not use behavioral finance techniques.3 Knowing what drives human behavior is one thing; using psychology to improve client relationships and, ultimately, portfolio outcomes, is another. But it’s worth it: Based on a Vanguard survey, the emotional value that an advisor creates through behavioral coaching accounts for about 40% of the total perceived value of an advisor-client relationship.4
“As they managed through this past year, advisors found that traditional measurements were not holding up during times of economic and market stress. There’s real value in helping clients understand their own psychology when it comes to evaluating individual risk profiles and how they think about protecting and growing their money, especially in volatile markets,” said Dr. Daniel Crosby, Chief Behavioral Officer at Orion. “Being able to predict which clients will react negatively to financial uncertainty can help ensure that advisors are reaching out to their clients at the right time.”
The Benefits of a 3D Risk Profile:
● Provides advisors with the ability to create portfolios that clients will stay with
● Deepens advisors’ relationships with clients by educating them on the process and expectations to ensure successful investment outcomes
● Designed by leading behavioral finance PhDs
● Pre-identifies clients who will need more attention during market volatility
● Defensible process for Reg BI compliance, by including 20 questions and measuring three dimensions
The 3D Risk Profile will be available for use with Orion’s financial planning tool, within HiddenLevers’ proposal capabilities, and on the Orion Portfolio Solutions platform.
2 Dalbar Report “2021 Quantitative Analysis of Investor Behavior – Variable Annuities (“QAIB-VA”)
4 Vanguard “The value of advice: Assessing the role of emotions”