- Insight: Traditional ways of discussing risk — relying on terms such as “variance” and “standard deviation” — are neither intuitively nor emotionally meaningful to clients. Behavioral finance bears out this disconnect.
- Implication: Clients who don’t understand risk are more likely to make ill-informed decisions when there is market volatility. Clients potentially suffer subpar returns from their behavior, studies show, and advisors face retention challenges during periods of volatility as a result.
- Implementation: Specific questions and exercises can help clients define the risk that they ascribe to each specific goal.