The pandemic has created a “make-or-break” time for advisors: Either they will solidify their client relationships for life or they will lose their clients to competitors, according to Daniel Crosby, chief behavioral officer at Brinker Capital, an investment management firm based in Berwyn, Pa.
“This is our Super Bowl,” Crosby said. Those advisors who can guide their clients through the current crisis will have clients for life, he said. To do this, advisors need to take into consideration the behavior that affects investing, Crosby said in an interview.
“Over the past few months, we’ve seen firsthand how emotion can dictate our reaction to the health and economic changes happening around us,” Crosby said in a statement. “Managing external pressures versus our own investment instincts can be a balancing act, but knowing common behavioral investing errors and the unconscious tendencies we may have is key to being a successful investor.”
Several factors affect investors’ decision making ability, he said.
Investors, and people in general, think they are better at predicting the future than they are. In addition, emotion can override rationality when it comes to making financial decisions, Crosby said.
Negative scenarios affect investing decisions more than they should because negative factors seem more likely to happen than they actually are, he added.
“Historically, a market correction happens every five or six years, but investors expect a correction is lurking around every corner. Market corrections are scary and investors are likely to try to protect themselves from corrections that will never occur,” Crosby said. “This often makes them afraid to take appropriate risk or they overpay for hedging products.”
Investors also over invest in the familiar, he said. “They hold too much stock in the company they work for or they invest too much in the country where they live,” he said. A portfolio should be balanced with domestic and international equities. Most people living in the United States hold too much in U.S. equities rather than properly diversifying.
“Emotion makes us dumb” when it comes to making investing decisions, he added. “This pandemic makes things worse because investors are worried about themselves and their families. It is a health and wealth crisis,” rather than just a wealth problem, he said.
Advisors can help their clients by telling them not to binge watch negative news coverage and not to check their accounts every day. Social disconnection heightens emotion and that has been difficult or impossible to avoid in the last six months, Crosby said.
“Advisors can help their clients focus” on the positive and can even help them manage stress, he added. “He or she can remind the clients why they started on this investing journey in the beginning. This is our time to shine as a profession.”