Have you ever felt like pulling the hairs out of your head when clients let emotion and biased behavior creep into their investment decisions? Well, new research says advisors may need to take a look in the mirror.
Investment advisors, just like clients, are prone to behavioral biases such as overconfidence and "regret avoidance" that sometimes influence how they make investment decisions, according to a white paper by SEI.
"Advisors are human, too," said John Anderson, a managing director at Independent Advisor Solutions by SEI, in a statement. Still, if advisors recognize the ways they are impartial and try to keep them in check, “it will foster trust and open dialogue with clients, which is essential to an advisor's business success in any market environment."
Twenty-six percent of surveyed advisors ranked overconfidence—basically overestimating their own abilities—as the biased behavior that most affects their decision-making, according to the paper. That was followed by regret avoidance—fear of repeating a past mistake—which came in second at 21%.
Advisors cited these two biases as the most important to keep a lid on, while also citing other tendencies, such as "herding"—being caught up in the crowd mentality when investing; "confirmation," or viewing information in a way that confirms one's own beliefs; and "loss aversion," where the pain of losses is more acute than the pleasure of gains.
The white paper stressed that even though biases can lurk in the subconscious, advisors should make an effort to be aware of their own behavioral tendencies.
These were some of the tips SEI researchers offered advisors for keeping their biases in check:
• Develop disciplined, repeatable processes that can minimize shortcut thinking.
• Make a habit of considering other possibilities by frequently checking your conclusions and recommendations.
• Reframe errors as opportunities to learn and grow rather than evidence of your competency or status.