As the COVID-19 pandemic drove investor uncertainty and heightened retail investor interest in the markets, financial advisors reported a surge in behavioral biases among clients according to a new survey.
The latest data comes from the BeFi Barometer report, a collaborative effort between Schwab Asset Management, the Investments & Wealth Institute and Cerulli Associates.
Advisors saw significant upticks in multiple categories of the common behavioral biases that affect client investment decisions year over year:
- Recency bias – Easily influenced by recent news events or experiences: 35% (2020) vs. 58% (2021).
- Confirmation bias – Seeking information that reinforces existing perceptions: 24% to 50%.
- Framing – Make decisions based on the way the information is presented: 26% to 44%
- Familiarity/home bias – Preference to invest in familiar (U.S. domiciled) companies: 27% to 43%.
- Loss aversion – Playing it safe or accepting less risk than they should tolerate: 30% to 43%.
According to the report’s analysis, the behavioral biases and client interest in new types of investments were potentially driven by outsized media attention on buzzy investing trends, as well as social media and influencers. Just over half of advisors said clients sometimes or frequently raised questions about stocks they saw on social media (52%).
Sixty percent said clients have invested in cryptocurrency in the last year, while one-third invested in special purpose acquisition companies and a quarter invested in so-called ‘meme stocks.’
When faced with inquiries from clients about social media-driven investment ideas, most advisors advised clients that these investments were unsuitable for their portfolios and did not invest in them (73%).
But experts say that the massive uptick in behavioral biases will actually create even more opportunity for advisors and investor education in the future—which in turn can help bridge the so-called retirement savings behavior gap.
“There has never been a more critical time for advisors to incorporate behavioral finance techniques into their practices to understand and help clients stay on course to reach their long-term financial goals,” said Omar Aguilar, PhD, Chief Investment Officer and Head of Investments at Schwab Asset Management. “The combination of pandemic-driven uncertainty, market volatility, and speculative investing trends have culminated in an environment where behavioral biases thrive.”
While studies have shown that behavioral biases can also affect advisors, they point to the effectiveness of using several behavioral finance techniques to mitigate these issues with clients. And many behavioral finance techniques are resonating with advisors and investors even more in the current market environment than in past market cycles.
“Advisors can always use behavioral finance techniques to their advantage, but in times of market uncertainty, such skills can be a true differentiator,” said Asher Cheses, Associate Director of Wealth Management at Cerulli Associates. “Our findings this year—a year of unprecedented challenges, uncertainty, and volatility—support that those who leverage behavior bias mitigation techniques were able to secure client trust and retain assets.”
There are many ways that advisors can leverage behavioral finance techniques to address specific client characteristics and profiles, adds Investments & Wealth Institute’s Devin Ekberg, Chief Learning Officer and Managing Director of Professional Development.
Specifically, when it comes to how advisors are implementing behavioral concepts, 74% do it through client communications, predominantly to align their communications with clients’ emotional tendencies (68%). Fifty-six percent leverage behavioral concepts within the portfolio construction process to match risk tolerances (78%) as well as age (73%) and wealth (62%) factors.
“Advisors who use behavioral finance are building stronger relationships and retaining more clients,” notes Exberg. “Perhaps most importantly, they are helping their clients stay the course through challenging times, which has huge impacts when it comes to investment performance and meeting long-term goals.”
Lynn Brackpool Giles is a contributing editor to 401(k) Specialist. Giles is a former Managing Director of Communications and Consumer Services for the Financial Planning Association (FPA), where she oversaw all corporate, legislative, and consumer communications. In her current journalistic practice, she is a frequent contributor to numerous financial services industry publications.
