The vast majority of affluent investors somewhat or strongly agree that they display at least four forms of behavioral bias that financial advisors can help them overcome, a new study found.
More than two-thirds of the potential clients representing "two segments of investors of significant interest to financial services providers" say that they show tendencies toward common biases known as availability, confirmation, recency and loss aversion, according to a
"The good news is that we have some self-clarity in now realizing that, 'I think we need to partner with that financial professional to have that clarity,'" Julie Genjac, vice president of applied insights for
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The survey
With weighted sampling representative of affluent investors, Cerulli and MarketCast spoke last year with those who have more than $250,000 in assets and "near affluent" prospective clients under 45 years old who earn more than $125,000 in annual income.
They asked participants about seven typical biases in investing:
- availability, which is "basing decisions only on readily available information";
- confirmation, or "seeking information that reinforces existing perceptions";
- recency, "being easily influenced by recent news events or experiences";
- overconfidence, "being overly confident in one's own ability";
- loss aversion, "opting for less risk in portfolio than is recommended";
- herding, "following the crowd or latest investment trends"; and
- anchoring, "focusing on a specific reference point when making decisions."
Pollsters made a statement — for example, in the case of availability bias, "I tend to rely on information that is readily available or easily recallable" — then asked investors the extent to which they agreed the remark reflected their behavior.
At least 88% somewhat or strongly agreed they have availability bias, while 78% self-reported a fixation with confirmation. Sixty-nine percent said they were loss averse, and another 67% admitted they get distracted by recent events. Only two biases — herding and anchoring — drew a majority of respondents disagreeing with the pollsters' statements.
Compared to a similar 2020 survey, availability and confirmation remained the most frequently cited biases. At a decline of 11 percentage points, the responses for herding changed the most over the prior three years, followed by a drop of 9 percentage points in overconfidence. At a gain of 2 percentage points, loss aversion was the only bias to increase over that span.
"For both herding and anchoring, a trusted third party that has an overall view of financial markets can help pinpoint why a client has this particular anchor point and can work that into finding long-term solutions for their investing needs," John McKenna, a research analyst with the retail investor team at Cerulli, said in a statement.
"With the help of technology, holistic financial planning can take the next step toward better client relationships that address clients' conscious and subconscious feelings when it comes to money — an inherently emotional topic," he continued. "While such tools do not dismiss or seek to cure behavioral biases, they may assist advisors in tailoring their advice toward respecting these biases and ensuring they can approach clients in a respectful, healthy manner while also creating a portfolio that is sustainable in the long term."
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Applications
Experts from some fintech firms offering those planning-related services described how they aid advisors.
"That can be a very challenging client to work with," Stanley Fallaw said. "They think they know everything, but they need a lot of education and coaching to be a long-term investor."
"We know from behavioral finance that people can be strangers to ourselves at some times," Morningstar
Action bias — another typical bias that wasn't discussed in Cerulli's report — shows why such conversations carry major implications to advisors and to clients' bottom lines, according to Morningstar
For example, with the consensus expectations for a recession coming into 2023, 87% of investors did something to prepare for a downturn, according to
"We prefer to take action in times of stress over doing nothing," Labotka said. "The fact that people want to act and they're not necessarily going to consult their advisor before they do really speaks to the importance of advisors getting ahead of that."
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Professional development
Financial therapy, an expanding field that is related to behavioral finance but different, reflects how many advisors are putting such principles into practice, according to Ashley Agnew, the director of relationship development for Needham, Massachusetts-based
"We're getting these questions more from financial advisors who are saying, 'OK, I've seen the research, but what are my action items?'" Agnew said in an interview. "The way I put the metaphor is, behavioral finance is reading the book, and financial therapy is doing the work."
In the past three years, membership has grown by more than 100 to 440, and certificants have more than doubled to 98, Agnew noted. Practitioners like Travis Sholin, the CEO of Omaha, Nebraska-based
"These tools can help identify behavioral biases, track client behavior over time and provide personalized recommendations based on behavioral insights," he said in an email. "We teach financial psychology/behavioral finance to all of our team members and also go out and learn from industry leaders."
