More advisors are looking to integrate behavioral biases into their practice in an effort to strengthen client relationships and increase retention, according to a recent study.

Most of the respomdents in a poll of more than 300 advisors, 70%, indicated that they incorporate behavioral finance within the context of client communications and interactions, while 58% said they incorporated it in the portfolio construction process, according to the BeFi Barometer 2019 study conducted by Cerulli Associates on behalf of Charles Schwab Investment Management.

The report suggested that in order for advisors to maximize the impact of their efforts, they should take a more proactive approach to incorporating behavioral finance practices throughout their client service and portfolio construction processes.

The research noted that advisors recognize the benefits of putting behavioral finance into practice when dealing with clients. Fully half (50%) see it as strengthening trust, 49% see it as improving their investment decisions and prioritizing goals, and 46% view it as better managing expectations. The report further suggest that advisors can potentially help clients achieve better investment outcomes and stay invested during periods of volatility by applying behavioral finance principles, including strategic asset allocation.

“Recognizing behavioral biases is an important first step to keep emotions in check and avoid missteps that may have a negative impact on long-term financial goals,” Asher Cheses, research analyst, high-net-worth at Cerulli, said in a prepared statement. “Advisors who incorporate behavioral finance principles into their practice can help their clients put guardrails in place to avoid irrational decision-making and better adhere to a long-term financial plan.”

Advisors (35%) say “recency bias” (being easily influenced by recent news or experiences) is the most common behavioral biases that impact their clients’ investing decisions. Twenty-six percent said clients are impacted by loss aversion bias (playing it safe or accepting less risk then they can tolerate); 25% said confirmation bias (seeking information that reinforces their perception); 24% said familiarity/home bias (a preference to invest in familiar/U.S. domiciled companies); and 24% indicated that anchoring bias (a tendency to focus on specific reference point when making investment decisions) got in the way of their clients’ investment decision-making.

The research cautions advisors to be cognizant of the variations of biases across different client types and age groups. Fifty-four percent of respondents said framing bias (making decisions based on the way the information is presented) was most common among millennials; 64% said Gen X slanted toward recency bias; 75% said Baby Boomers swayed more toward anchoring bias; and 84% said the Silent Generation most commonly associated with familiarity/home bias.
“Understanding the different preferences and attitudes of each generation and addressing their unique biases accordingly can lead to stronger client relationships and potentially more optimal investment results,” the report noted.

The research also pointed out that advisors should be cognizant that their own biases can impact investment decisions. Twenty-nine percent of advisors rated loss aversion as the most significant bias affecting their investment decisions, followed by overconfidence bias—overestimating one’s own abilities (17%); confirmation bias rounded out the top three with nine percent.

The report acknowledged that while advisors might not be able to completely offset their own or their clients’ biases, there are specific techniques they can adopt to reduce the impacts of various biases. Such techniques include, taking a long-term approach particularly in periods of volatility, reminding clients of their investment goals and ensuring they adhere to a sensible financial plan. The report noted that 62% of advisors cite this strategy as “very effective.”

Another technique is to use systematic process such as automatic rebalancing. Setting up guidelines and parameters for managing one’s portfolio can help take emotional decision making out of the process to avoid biases such as overconfidence, loss aversion, and herding, the report said.  This strategy is cited as “very effective” by 52% of advisors.

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