The findings add to a growing recognition that behavioral finance is an important part of the wealth manager's intellectual toolkit and a way of operating more effectively.

A study of more than 300 wealth advisors found that at least half of them said understanding how human behavior affects investment decisions strengthened client trust, and almost the same proportion (49 per cent) said this improved client decisions.

The findings came from a white paper from Charles Schwab Investment Management, Cerulli Associates, and the Investments & Wealth Institute. “BeFi Barometer 2019” uncovers behavioral biases that advisors observe among clients, including differences among generational cohorts, and explores how advisors use behavioral finance principles to help clients mitigate negative impacts.

“Investors aren’t the only ones with biases. Surveyed advisors reported having their own behavioral biases,” the report said.

Behavioral finance seeks to understand the influence of psychology on investor behavior and suggests that investors aren’t always rational, have limits to their self-control, and are influenced by their own biases. The field has become far more mainstream than was the case a couple of decades ago. When Richard Thaler won a Nobel Prize in economics in 2017, one of the fathers of “behavioral economics”, he helped entrench this discipline as one of the most important areas of study. Recently, Professor Thaler was named as an advisor by bond fund management titan PIMCO. (See another recent feature on the topic here.)

At a time when advisors fret about defecting clients, for example, any insights that can give firms an edge win attention. A more difficult claim for this discipline might be that investors make more money than they would otherwise have done had they acted differently.

“Recognizing behavioral biases is an important first step to keep emotions in check and avoid missteps that may have a negative impact on long-term financial goals,” Asher Cheses, research analyst, high net worth at Cerulli Associates, said. “Advisors who incorporate behavioral finance principles into their practice can help their clients put guardrails in place to avoid irrational decision-making and better adhere to a long-term financial plan.”

Among other findings of the report, 46 per cent of advisors said understanding behavioral finance helped them to manage clients’ expectations more effectively; 40 per cent said it reduced clients’ emotional decisions, and 36 per cent said it helped clients to achieve better investment outcomes.

There are a number of biases and traits that apply. One of them is called “recency” and it means “belief that recent news and events will continue, which can promote chasing performance and investing in fads”. The report found that 36 per cent of advisors noticed this happening with clients. Another bias is loss aversion: the tendency to prefer avoiding losses rather than achieving equivalent gains, causing clients to accept less risk than they can tolerate. Some 26 per cent of advisors said that their clients exhibited this tendency.

Among advisors themselves, 29 per cent said they were prone to loss aversion.

The survey results suggest that vulnerability to specific behavioral biases varies by client age. The advisors surveyed observed that the following biases are the most prevalent in each generation:
--  Millennials: Framing bias (making decisions based on the way the information is presented): 54 per cent.
-- Generation X: Recency bias (being easily influenced by recent news events or experiences): 64 per cent.
-- Baby Boomers: Anchoring bias (a tendency to focus on specific reference point when making investment decisions): 75 per cent.
-- Silent Generation: Familiarity/home bias (a preference to invest in familiar/US domiciled companies): 84 per cent.