Advisors who run successful RIA firms have mastered the art of making smart business decisions amid suboptimal conditions and external pressures in the wealth management industry. This is a rapidly evolving industry, and RIAs find themselves under constant pressure to innovate and respond to competition while growing assets and profit margins.

When it is time to act, RIA leaders need to be able to trust their instincts, but not without a healthy dose of self-awareness and understanding of their own inherent decision-making biases. Though advisors may not be able to avoid bias entirely, they can recognize the common biases and help mute the effects.

The ‘Rush to Act’ Bias

The ever-evolving wealth management industry can leave some RIAs believing they are required to respond or react immediately to every competitor business decision or news headline. While many great leaders make decisions quickly and decisively, no one should rush to act without correct or adequate information. An RIA owner's overconfidence or false confidence can trigger a misplaced sense of urgency and result in devastating consequences. That can have negative effects on a firm's bottom line or reputation.

Anchor Fact Bias

Too often, mission-critical decisions are based on one or two anchor facts, or key beliefs, whose basis in accurate data might be tenuous at best. For example, many believed that robo-advisors, in their early days, were for smaller accounts. It was also widely accepted that millennials were the robos’ key users and preferred them to live advisors. But the appeal of digital advice has crossed generations, particularly when robos are offered as a hybrid service with human advice. As a result, today many RIAs are revisiting strategic growth plans they made based on these widely held, incorrect anchor facts.

Data Availability Bias

Research is a dying skill, and people these days make decisions biased by whatever is returned in the first couple of pages

of a Google search, yielding to the site’s prioritization algorithm. Consider RIA succession planning. The lack of publicly available valuation guidelines means that RIAs rely on readily available revenue multiples to justify what they believe their firm is worth. The result can be an inflated perception of their firms’ valuations and a harsh reality check at deal time. Advisors with longer time lines use readily available data that may not apply to their particular set of circumstances, and make poor decisions that will impact their business succession.

Optimism Bias

When talk turns to their firm’s growth, some advisors ignore obvious risks because they simply assume that only good things will happen. For example, RIAs contemplating a merger or acquisition or entering a new market may consider only the most optimistic data, which does not reflect reality or what is attainable. RIA leaders sometimes seek out only that information confirming their personal beliefs—leading them to confirmation bias, a cousin of optimism bias.

False Consensus Bias

Outside of the office, it is natural to gravitate toward friends and family who validate us and boost our self-esteem. But this can be problematic for people making business decisions, and an RIA can be lulled into the trap of assuming everyone thinks the same way. By choosing partners or colleagues who are always in agreement, advisors set themselves up to entirely miss alternative arguments and find themselves blindsided by competitors’ business strategies.

Halo Effect Bias 

This happens when wealth advisors value a person, product or vendor's likable characteristics more than its substance. Halo bias gives more credence to project proposals when they are submitted by staff or vendors believed to be smart or articulate, even if the proposals are off base. RIAs do this when they select a portfolio management system and choose the vendor with the bigger brand name without critically comparing technology and features.

Self-Serving Bias

This happens when an advisor, facing the loss of a top employee, client or prospect, blames extenuating circumstances and external forces rather than him-

or herself. An advisor suffering from this bias takes no responsibility for such business failures. It may protect the advisor’s self-esteem, but it keeps him or her from learning from failures and shortcomings and evolving into a true leader.

Getting Beyond The Biases

The antidote to these biases starts with self-awareness. Once RIAs recognize their biases, they can put checks and balances in place to make more thoughtful decisions.

For starters, advisors should first determine what information they need to make a decision and then seek it out, rather than base their decision on information that’s easily available. This could mean being patient while sufficient data is gathered in order to avoid making hasty decisions. The key is not to wait for all the data, but to establish a reasonable time frame for collecting enough so that the decision is an informed one.

Advisors should use the appropriate financial models to make economic decisions, and supplement this with qualitative components. They can eliminate many biases if they start with the proper framework at the outset—even if model assumptions are necessary.

When considering new products and services, RIAs should seek thorough reviews from multiple parties, including those who will be affected by the change, those who will support it, and possibly legal and compliance officers.

Finally, advisors should seek out diverse opinions, which is healthy and helpful for countering inherent biases such as overconfidence. Advisors should not let business decisions define them, and instead strive for emotional detachment. This will help them achieve objectivity—and possibly even keep them from escalating a poorly thought out commitment and throwing good money after bad—in the event that things go awry.

Zohar Swaine is the president of Mink Hollow Advisors, a strategy consulting firm serving the C suite of the wealth management industry.