CHICAGO – I went to Morningstar’s panel on the latest techniques in behavioral finance for advisors with high hopes. But while the speakers made some strong points about psychological bias, they ignored the elephant in the room. Actually, make that about 150 elephants — the advisors who attended the panel, along with fund managers and other financial professionals.
Investing is simple but not easy, according to Morningstar's Steve Wendel, the head of the firm’s behavioral science division. Learning about our biases helps clients become better investors, so advisors must be behavioral coaches to our clients.
During the presentation, Wendel referred to Russ Kinnel's work at Morningstar showing that investor returns lag fund returns due to poor timing. In other words, performance chasing.
Wendel made the case that advisors should help clients understand their behavior and get them prepared for the inevitable stock plunge. That can inoculate them from bad behavior, he says.
We advisers are people, too, and we must first control our own behavior.
Morningstar's Samantha Lamas, a marketing associate, says she believes that tailoring advice to different generations is key. Retirement means something different to a 25-year old than a 60-year old client. They will likely have very different answers when asked where they want to be in 10 years. Thus, they will have different motivations.
But, I think the elephant in the room was completely ignored. We advisors are people, too, and we must first control our own behavior.
Years ago, I wrote how advisors were heavy in stocks on October 9, 2007, at the height of the real estate bubble and heavy in cash on March 9, 2009, at the bottom of the market. We timed bonds poorly because we were confident that tapering and ending Quantitative Easing would lead to rising rates. Rates declined significantly as bonds rallied.
Perhaps we should take a painful look at the advice each of us gave clients at that time, to see if we timed markets poorly. What role did our own biases play in our portfolio decisions? Don't assume it was those other advisors who behaved badly. No market plunge or surge should go wasted. We are kidding ourselves if we think we can inoculate ourselves, or our clients, from the pain of a market plunge. The best we can do is work through the pain and buy stocks when the herd is selling. That is truly simple but not easy.
If we use behavioral finance to acquire clients, it will surely backfire. But if we use it to help clients, we may find those clients become fans who refer other clients.
