If you’ve ever squinted at price tags in the grocery store or on Amazon, searching for better value, but barely blinked at a bland letter about a 0.1% shift in your mortgage rate, which would have a much greater impact on your financial well-being, you’ve known the very definition of being “penny wise, pound foolish.”
This phenomenon, in behavioral economics, is known as “mental accounting”: it encompasses how we treat money differently, depending on its purpose. It’s just one example of the curious, idiosyncratic ways people engage with their finances.
For financial advisors, integrating a greater understanding of human behavior into guiding your clients is no longer optional — it’s essential. Here’s why.
Evolving Client Needs
The world is changing rapidly. People are living longer, leading more flexible lives. Accenture Life Trends recently outlined how we are entering a "Decade of Deconstruction," where traditional life stages — such as starting a family, buying a home and retiring — are giving way to more fluid, multi-stage lifestyles. These changes in lifestyle and behavior are exposing gaps in traditional approaches to retirement planning and life insurance, where the conventional financial models responsible for securing the population’s wealth for retirement are less dependable, significantly increasing systemic risk.
For example, research has shown that today, nearly half of people plan for their lives less than a year ahead; and 43% of Americans are afraid of outliving their savings. Compounding these challenges are cognitive biases that make long-term financial decisions even harder. We tend to undervalue future costs and benefits, often leading to poor financial choices, such as procrastinating on retirement plan contributions or overspending after payday. To address these challenges, financial plans must not only help clients navigate these biases but also evolve their approaches to help clients meet their changing goals.
Rethinking Client Engagement
Over the past decade, digital interactions between consumers and financial institutions have surged 12-fold, emphasising the importance of the digital medium. However, many firms have struggled to build meaningful relationships through these platforms, often caught in a "sea of sameness," of jargon-heavy, commoditized offerings that leave many firms struggling to differentiate themselves.
The financial services industry is famous for using $50 terms for $0.05 concepts. Firms need to change the perception that investing is “hard” — clients are natural “cognitive misers” that prefer to expend as little mental energy on finding the right answer to their money needs as possible.
Moving into 2025, we are seeing an accelerating demand for faster, more intuitive financial advice. Increasingly, individuals are bypassing traditional institutions, opting for advice from influencers and online phenomenon like Fintok. With $72.6 trillion set to transfer from Baby Boomers to younger generations by 2045, wealth management firms must meet the expectations of tech-savvy clients who demand intuitive, hyper-personalized, services.
How to Integrate Behavioral Insights
From our extensive research, we have listed the three most effective approaches for firms to integrate into their service offerings today:
1. Redefine Client Segmentation
Wealth management firms should move away from rigid, product-centric models and embrace human-centered approaches that cater to individual behaviors and needs. Traditional customer segmentation by wealth brackets is outdated; instead, firms should focus on categorizing clients based on their behaviors, preferences and financial goals.
