Financial advisors can exploit clients’ financial biases to create opportunities for themselves, while at the same time helping clients, according to the Brandes Institute.
Investors have certain emotional biases that affect their investing, and advisors need to recognize them, said Bob Schmidt, manager of the research institute, which is part of Brandes Investment Partners, a worldwide financial services firm.
Investors are guilty of certain predictable, irrational behavior that can cost them money, but which advisors can help correct, said Matt Johnson, director of private client sales at Brandes Investment Partners.
The two addressed the issue during a webinar Tuesday sponsored by Brandes Institute in San Diego and Brandes Investment Partners on “Training the Investor Brain: Tactics to Manage Client Emotions.”
“Clients often jump to conclusions that are incorrect based on what they perceive,” Schmidt said.
People are loss averse and will take more risks to avoid loss than they will to reap returns, Schmidt said. “They make investment decisions based on this bias. A loss of assets hurts more than regaining the same assets makes an investor happy.”
To avoid this, investors should be advised to not check their portfolio, which could be a well structured one, every day. The daily losses will be felt more than the next day’s gain and the investors will come away thinking they are doing badly when they are not, Schmidt said.
An advisor should know where his or her clients are getting their news because people look for confirmation of what they already believe. If they think the market is doing badly or is going to in the near future, they will look for news that confirms that and ignore anything contrary. An advisor can help correct that by presenting different information, he said.
“Advisors need to frame any situation in a long-term time frame,” he added. “Timing the market is virtually impossible because best and worst days cluster together, and a person cannot pick just the best days. The longer you stay invested in equities, the better chance you have of growing the portfolio.”
“Train your investors not to panic,” Schmidt said. “People have a natural inclination to want to do something when the best course of action may be to do nothing.”