SEI Canada research shows common biases and how volatility exacerbates them
Behavioural biases, unconscious beliefs or ideas that affect our decisions, are common in advisor-client relationships, but how are they impacted by market and economic conditions?
A new study looked at the common biases that Canadian advisors and their clients may have as part of the inaugural Behavioural Coaching Survey from SEI Investments.
With greater demand from clients for more collaborative and personalized experiences with their financial advisors, these biases are likely to show up, but by identifying them and having a productive approach to handling them is key.
“Rather than avoid this emotional terrain, advisors can create space for discussions about the
existence of biases and their potential impact on clients’ financial health,” said Anne Hoare, head of Asset Management Solutions at SEI Canada. “Talking about these areas can put the advisor in a position to coach clients away from acting on biases and toward better outcomes.”
The study found that 25% of advisors say that clients are more likely to change their existing financial plans in times of volatility.
Common unconscious biases
The study reveals several common unconscious biases seen in advisor-client relationships
For example, ‘loss aversion’ or the greater sensitivity to loss than to gains. Advisors with this bias may recommend investments that do not adequately meet a client’s risk profile as the advisor suggests less-risky options and in doing so limit growth opportunity. Around one third of advisors said they are affected by this bias while almost two thirds see it frequently in clients.
Despite the long-term goals of clients being a primary focus of advisors, another common bias is ‘recency’, in other words focusing on recent market events when making investment decisions. Around one fifth of advisors identified this in themselves and half said it is common among their clients.
We tend to gravitate towards things we know, and this is a common bias among advisors and their clients with 62% of advisors saying ‘familiarity’ steers them towards the asset classes they know best and 25% said that clients tend to do this.
Other common biases include ‘herding’ where advisors or clients follow popular investment trends or themes; falsely believing they have predicted a past event; overconfidence in skills or accuracy; and a false belief that more information will improve their decision making.
Resisting new ideas, applying different values to money depending on its origin or intended purpose, and allowing narratives to outweigh facts showed negligible results.
Goals-based approach
The research also highlighted the benefits of adopting a goals-based approach to wealth management.
Only one third of advisors said that every goal has its own portfolio to match their risk levels and time horizons and just 59% said they have created financial plans for all clients.
However, those advisors who embrace goals-based wealth management practices are shown to have deeper relationships with clients, better retention, and better outcomes for clients’ goals.
Overcoming biases
Coaching clients is also highlighted in the study as a way for advisors to overcome biases by adopting a collaborative relationship with the client that goes beyond advice and acknowledges biases.
This requires discussions to be on a more emotional level and creating space for this open approach to develop.
Co-planning, where advisors and clients work together on all aspects of wealth management is also helpful. The study found that 80% of advisors said their clients typically work with two or three advisors across areas such as financial advisors and insurance and tax specialists.
While more than nine in ten advisors said they believe clients trust their decisions, they also noted the influence of friends and family and social media, which increase the need for coaching clients.
While more than half od advisors said they have processes in place to proactively combat investor bias during volatile times, just 14% use their CRM software to track clients by bias.
