Let’s talk about loss aversion
Let’s face it, 2020 feels rough for most people. We snapped from bull market to bear market to bull market to who knows. Some 33 million Americans were unemployed in June, and a third of US households missed their housing payments in July.
Many Americans are going to spend the next several months — possibly years — with no good choices when it comes to money. And loss aversion means they’ll be terrified about making the wrong one.
Which is why we need to talk about loss aversion. It could be key to how you, as an advisor, best demonstrate your value right now. Particularly when it comes to winning new clients.
What is loss aversion?
If you’re not familiar, this is a central tenet of behavioral economics. The loss aversion theory goes: People are more scared of loss than they are excited by gains. To be specific, the pain of loss is about twice as powerful as the pleasure of winning.
So when we’re talking to people who have no good choices, how we frame that could matter.
It’s not, how to make the best choice in a bad situation.
Instead, it’s how to avoid making a bad choice that could cost you.
No good choices
If a client is already working with you, they’re likely prepared for the current uncertainty. But only 17 percent of Americans use a financial advisor.
The 75 percent of people who manage their own money — some of whom may have been charmed by “the longest bull market in history” that seemed like it might never end — could be in some trouble right now.
For the families that don’t even have $1,000 saved for emergencies, choices might come down to: tap a 401(k) or tap a 529? Pay the mortgage or pay medical bills?
Often these choices are loaded with consequences that people aren’t equipped to evaluate. And that’s where advisors come in handy.
You can make sure they don’t make the wrong choice.
For instance: Someone might be considering dipping into an IRA based on the very popular headline that they can do so without getting hit by federal taxes. But they might not realize that the logistics of this provision mean they actually WILL pay federal taxes… they’ll just be reimbursed for those taxes when they reimburse their IRA. And that’s a heads up you can provide.
You can help them avoid that big tax hit in April by explaining what other choices they might have. And if it’s really the best choice for them, you can make sure they’re not surprised by a significant tax bill.
And that’s a big value you can add right now.
Remember: Loss aversion means helping people avoid costly mistakes is 2x more powerful than helping them make good choices.
Test the theory
Loss aversion is plenty controversial in some circles, and there’s evidence that shows our backgrounds and history influence how we feel about both gains and losses.
So test your messaging. Write an email about how you can help with tough choices right now. And do an A/B test on headlines.
A: Make smart choices during COVID: How we can help
B: Avoid costly mistakes during COVID: How we can help
See which choice gets more opens and engagement. You could run a digital ad that uses a similar approach. In this case, it might be:
A: We can help you make good choices during the COVID uncertainty
B: No good choices? We’ll make sure you don’t damage your finances during COVID
See which ad gets more click and drives more traffic to your site. You may win in your market with positive messaging. But you may also find that using loss aversion helps boost your outreach right now.
Don’t miss this opportunity to help
At the end of the day, growing your client base is good business for you. But during an economic downturn, growing your client base is also an opportunity to help people who need it. Sending the right message could enable you to do that.
And one final thought to remember: Rich people make bad money choices, too.
Targeting people who are in a tough spot right now doesn’t mean sacrificing assets or targeting a new type of client. It just means acknowledging the reality that a lot of people are bad with money, even if they have a lot of it.
Sources: Loss Aversion theory, Percent of Americans with financial advisors, Americans don’t have $1,000 saved, CARES Act IRA withdrawal tax rules