WM Market Reports

Wealth Advisors Increasingly Use Behavioral Finance To Win, Counsel Clients

Tom Burroughes, Group Editor, September 9, 2020


Some 55 per cent of advisors who used behavioral finance said it helped keep clients invested when markets were choppy; 48 per cent said it fostered strong client relationships and improved client retention; 40 per cent said they were able to manage client expectations more effectively, and 37 per cent said it cut short-term or emotional decision-making. 

“Advisors are guiding clients through an unprecedented market environment and emotions are running high,” Omar Aguilar, PhD, chief investment officer of passive equities and multi-asset strategies at CSIM, said. “Keeping clients focused on long-term plans and goals while mitigating their own biases through the uncertainty we are experiencing today is no small task. Keeping a disciplined approach and a clear communication plan are critical elements to helping clients achieve their financial goals. It is exciting to see that advisors are recognizing the value of putting behavioral finance concepts into their practice.”

“Behavioral finance is always relevant, but this moment really brings to life the impact it can have on advisor’s practice,” Asher Cheses, research analyst, High Net Worth at Cerulli Associates, said. “The results of this study bode well for increased adoption of behavioral finance programs going forward.”

Asked how advisors said client investment activity changed since the first three months of 2020, 53 per cent of advisors using behavioral finance said that clients used the market opportunity to use tax-loss harvesting, while 44 per cent of non-users said clients did so; 28 per cent of BF users raised allocations to active managers who might outperform in current conditions, while 22 per cent of non-BF users did so. 

The most common bias noted among clients by advisors was what is called “recency bias”, which is when a person is easily influenced by recent news or experience. In 2020 there was a rise in “loss aversion” among clients (playing it safe or accepting less risk than they should tolerate), and an uptick in home bias (preference for investing in familiar, domestic companies). The report also showed a rise in framing (making decisions on how information is presented), and mental accounting (splitting wealth into different buckets based on financial goals, rather than thinking of wealth as a whole).

The discipline harnesses what is known about human psychology to understand that the decisions people make with savings, investments and spending aren’t as coolly rational and objective as one might think. Humans don’t, so the argument goes, start off in life with a mental “blank slate” but instead carry habits and tendencies that are products of millions of years of human evolution. (Some of these notions can be controversial – the field known as evolutionary psychology, drawing on ideas from Darwin and others, can carry political implications such as male/female differences.)

BF practitioners in this area generally seem to argue that the more humans understand how they think, and how they can be biased, paradoxically, the more rational their choices could be. For example, a person who knows that they have a short temper in certain situations might be more careful about avoiding such situations; a person with an addictive personality might take care to avoid getting into environments where temptations exist, and so on.

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