What Is The Value of Behavioral Coaching?

August 2024, by Bob Veres, Inside Information

Synopsis: Here’s the first fintech solution to address the largest component of what Morningstar and Vanguard have termed ‘Advisor Alpha.’

Takeaways: Not all investors get the same benefit from behavioral coaching. The key is to measure, not just risk tolerance, but the skittishness factor when markets are unstable, and then quantify how that could translate to investor underperformance.

Research from Morningstar and Vanguard has identified “Advisor Alpha,” which measures the additional value advisors can bring to clients beyond simple portfolio management. One of the largest components of this value is behavioral coaching, where advisors help clients avoid making emotional, impulsive decisions during market volatility. According to Vanguard, behavioral coaching can add up to 1.5% or more annually to a client’s returns.

Despite the importance of behavioral coaching, few fintech tools directly address it—until now. Helen Yang, founder of Andes Risk, developed the Behavioral Risk Index (BRI), a tool designed to assess an individual’s susceptibility to emotional reactions during market fluctuations. The BRI scores clients on a scale from 1 to 10, where 1 represents extreme calm and 10 indicates a tendency to react impulsively to market changes.

Yang’s research simulates how clients with different BRI scores might respond to major market downturns. For instance, a client with a BRI score of 7 might sell during the lowest points of a bear market and re-enter too late, leading to underperformance. In one scenario, this behavioral pattern resulted in an annualized return of 4.94% compared to 6.56% for a client with a lower BRI score, a difference of 1.62%. Over a 24-year period, this gap could result in a loss of over $1.5 million—highlighting the importance of effective behavioral coaching.

By using tools like the BRI, advisors can better predict which clients need proactive outreach during market instability. This helps prioritize communication efforts and enhance the value clients receive. Yang’s collaboration with Morningstar is further refining this approach, offering advisors new ways to quantify and deliver Advisor Alpha at the individual level.

Read the full article here.