New research on behavioural biases reveal advisor-client disconnect
The way someone’s personality affects their financial decision making should be given a higher priority; new research suggests.
Behavioural biases play an important role in how individual clients make their choices about investments, but the international study by Oxford Risk found that this is not always a core part of the advisor-client relationship.
Almost three quarters of wealth managers said they believe that emotional decision making costs clients in terms of investment returns, with almost two thirds estimating this loss of investable wealth to be an average of more than 100 basis points per year, with 15% believing it could be 200+ basis points.
But among clients, 21% don’t agree their advisor has assessed how their characteristics can drive financial decision making.
Meanwhile, 75% of wealth managers said that it isn’t among their key roles to help clients manage their emotions, 21% were neutral, and 3% said it was not part of their role at all.
A poll conducted by the CFA Institute in 2015 found that among 742 investment professionals 34% cited herding as the behavioural bias that affects investment decisions the most. Confirmation bias was also identified (20%), along with overconfidence (17%), availability (15%), and loss aversion (13%).
New rules
The research was conducted ahead of new Consumer Duty rules from the UK’s Financial Conduct Authority which will come into force next month.
The regulator says that: “Firms must understand and take account of behavioural biases and the impact characteristics of vulnerability can have on consumer needs and decisions.”
James Pereira-Stubbs, chief client officer at Oxford Risk said it’s concerning that so few clients believe their advisor has addressed the issue.
“Advisers need to document behavioural biases as part of their suitability systems and processes and crucially need to understand how to act upon them to ensure good customer outcomes as outlined in Consumer Duty rules,” he said.
Oxford Risk provides tools that include financial personalities as part of client profiling along with behavioural information and demographics.
