Plan participants aren’t the only ones affected by behavioral biases. New research reveals that advisors can be affected as well.
Advisors ranked “overconfidence,” the tendency to overestimate their skills and accuracy, as the top behavior (26%) that affects their decision-making, and “regret avoidance” comes in at a close second (21%).
Although advisors are aware of these biases and others, according to surveys conducted by SEI, a global provider of investment processing, management, and operations solutions, opportunity exists to better manage these behaviors in order to help deliver better results for clients.
“Advisors are human, too. Recognizing their own biases and taking proactive steps to keep them in check will foster trust and open dialogue with clients, which is essential to an advisor’s business success in any market environment,” said John Anderson, Managing Director and Head of Practice Management Solutions at Independent Advisor Solutions at SEI.
Advisor-client disconnects around risk
Biases are just one aspect to consider in the advisor-client relationship. In addition to differences in clients’ and advisors’ expected behaviors during times of market volatility, the study revealed disconnects in the perceptions and discussions around risk.
Risk profiling questions should be worded carefully to assess the client’s attitudes without introducing both advisor and investor behavioral biases. Client perceptions of risk are often driven by emotions and can be easily misunderstood or discounted by advisors who typically take a strictly rational approach. Measuring risk can be complex and not intuitive for most investors, highlighting a discrepancy between how advisors and clients view risk.
“It’s important for advisors to understand risk along two dimensions: market risk and shortfall risk. By shifting the client’s focus from benchmark performance to what it means if they cannot retire at 65 years old, the client and advisor can avoid knee-jerk reactions to short-term market movements, and instead focus on the end-game with full transparency,” says J. Womack, Managing Director of Investment Solutions at Independent Advisor Solutions. “By implementing a goals-based wealth management framework, these challenges can be overcome.”
‘Goals-based’ taken for granted?
The research also showed that “goals-based” may be used too liberally. A majority of advisors (59%) believe they are implementing a goals-based framework, with nearly all (86%) stating they align individual portfolios with individual goals. However, more than half (52%) of advisors manage only one or two portfolios per client, whereas a true goals-based wealth management approach builds multiple portfolios—each aligning to an individual goal.
In a true goals-based wealth management framework, traditional advisor-driven wealth management is replaced with co-planning and ongoing client-advisor engagement, supported by technology. Placing the client at the center of the conversation with the advisor serving as coach is vital, as research shows an average 150-basis-point positive impact on portfolio performance.1
“Coaching Through Biases—Yours and Your Clients” covers the study’s full findings and offers steps for advisors to take in implementing co-planning strategies and a full goals-based wealth management approach.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
