Overcoming Your Clients'--and Your Own--Behavioral Biases

September 5, 2019

When you expect your high-net-worth clients to do one thing during volatile markets and they say they’d do another, you’re got a real disconnect.

When J. Womack and I set out to write our newest SEI white paper “Coach though Biases,” we didn’t want just another “investors are bad and advisors are great” behavioral finance paper — there are already too many out there. While we do spend most of the paper arguing for the implementation of Goals Based Wealth Management, we had to acknowledge that advisors can limit the success of their clients too.

Sure, you likely know from experience that behavioral biases can cause your clients to act against their own financial best interest. Investors often make decisions trying to protect themselves from losses, especially during times of market volatility – making it harder to behavioral biasesreach their specific, longer-term goals.

But did you realize that your own behavioral biases can affect your ability to guide your client to potentially better outcomes? Our research suggests that financial advisors often show an overconfidence bias that may make them miss opportunities to coach their clients to success.

What else did we find?

When we compared survey responses from affluent households with responses from financial advisors, we found some significant disparities.  What advisors expected their high-net-worth (HNW) clients to do during volatile markets and what affluent households said they’d do didn’t line up¹:

  • Advisors expected their clients would take a wait-and-see approach; affluent investors said they’d make changes to their portfolios
  • 90% of advisors believed clients wouldn’t deviate from their financial plan; HNW investors were more likely to move money — and less likely to call their advisors for advice.
  • More than half of advisors thought “buy and hold” households wouldn’t make changes to their portfolios; 40% of such affluent houses said they’d likely make changes to their portfolios

Overcoming these disconnects between your expectations and your clients’ behavior is how you help your clients stick with their longer-term investing plans when markets are volatile.  The problem, of course, is that most advisors don’t acknowledge biases; their clients or their own.

Combatting emotional decision-making

Many behavioral biases are unconscious, but advisors can minimize judgement errors by being mindful of the impact biases can have on their thinking:

  • Develop disciplined, repeatable processes that help minimize short-cut thinking
  • Make a habit of considering other possibilities. Frequently check your conclusions and recommendations to avoid confirmation bias
  • Reframe errors as opportunities to learn and grow, rather than as evidence of your competency or status
  • Check your ego and make time to reflect. Are you overly invested in being right rather than discovering what you might have missed?

When is the last time you did a deep dive into your own investment philosophy, partners and most importantly, your results?  Advisors, like clients, tend to talk about their winners and don’t look at the entire book’s performance. 

Yes, it is still about the client

Once you’ve got your own biases under control, don’t neglect to manage your clients’ expectations and behavior. Clients are hungry for this kind of guidance. Affluent investors named the top attribute of a valuable advisor as someone who “helps me stay in control of my emotions,” in a 2019 Morningstar survey.

One way to help clients control emotional reactions and maximize their chances of reaching their goals is to reframe the way you talk about risk. When asking your clients questions about their risk tolerance, consider defining risk as the failure to meet specific financial goals.

Consider defining risk as the failure to meet specific financial goals.

When you discuss retirement, for example, talk about risk as the possibility of a shortfall — the risk that they can’t retire when or how they hope to. By linking your client’s goals, time horizon and economic constraints, the notion of risk can become more meaningful. Reframing the conversation this way helps your clients stay invested and perhaps prevent costly mistakes.

For more information on how you can overcome both your clients’ and your own behavioral biases, download Part One of Goals-Based Wealth Management Series, Coach Through Biases—Yours and Your Clients’.

Legal Note

¹SEI Financial Advisor Survey, Behavior Finance; April 2019, n=608. SEI, in conjunction with Phoenix Marketing International, March 2019 , n=653 total affluent U.S. households. Phoenix Marketing International is not affiliated with SEI or its subsidiaries.

Investing involves risk including possible loss of principal.

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