Behavioral Finance in Financial Advisory Services: Analyzing Investor DecisionMaking and Risk Management in Wealth Accumulation

Abstract

This essay focuses on behavioral finance in financial advisory services by considering their interaction. Investors often make financial decisions that are influenced by cognitive biases and emotions. An understanding of the psychological mechanisms can help to develop risk management strategies in a financial consulting setting. Financial consultants select risks rationally for their clients and, in addition to traditional parameters, tailor the risk to the individual client. The psychological profile of the investor is taken into account through demographic, financial, and social data. The main results are: For young investors, a riskier portfolio is selected, while for elderly investors, the expected return is given less focus; in the case of socializing investors, psychological characteristics like the control belief and self-efficacy determine the consequences of the demographic and social variables; the collected treatment is preferred in the sense of the Quiet Life Hypothesis, indicating that consulting is chosen to put less effort into the management of their finances, possibly letting the professionals do it quietly. Financial advisors, wealth managers, and brokers are responsible for professional portfolio management and investment, providing support to private investors. In offering such financial advisory services, professionals focused on financial advice develop various strategies for effective wealth accumulation.