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It’s Incredible How Biased Advisors Can Be

By Murray Coleman July 19, 2017

Coaxing better investment behavior out of clients isn’t every advisor’s cup of tea. But new research suggests professional money managers who aren’t keenly aware of their own behavioral biases are prone to making many of the same mistakes as amateurs.

“Clients aren’t the only ones who need to try to better understand their own behavioral flaws – a new body of research is increasingly showing that financial planners and advisors also suffer from cognitive biases and emotional issues,” says Victor Ricciardi, a professor at Goucher College in Baltimore and co-author of a new book published by Oxford University Press.

The 641-page opus – which is currently being previewed through extended excerpts republished in several academic journals – presents new evidence that portfolio managers have their own set of issues to face.

In broad strokes, Ricciardi suggests the latest data reveal a common “cognitive mental mistake” for advisors is stereotyping clients on initial engagements. He refers to these types of behavioral tendencies as Heuristics.

“The great concern is that planners who aren’t aware of behavioral finance won’t catch themselves falling into this sort of a trap,” Ricciardi says. Once they do, he notes, “the real lesson” is that understanding this sort of tendency “should help advisors to push themselves to ask clearer and more precise questions.”

Advisors also commonly underestimate how “emotional stress” can play a part in undermining their clients’ long-term financial success, Ricciardi points out. He finds that professional money managers often let themselves get too caught up in their own fears and anxieties when markets are acting unusually.

In particular, Ricciardi cites such symptoms as showing signs of “post-traumatic stress disorder” in advisors.

That might sound a little extreme to some, he admits. “But we’re not talking about hypothetical research – we draw from case studies where researchers went out and asked advisors how they were feeling after market downturns,” Ricciardi says.

The idea is to raise “real-life red flags” for professional planners to watch as they advise clients on a daily basis, he notes. “Advisors need to take a step back from how they personally perceive technical terms like ‘risk’ and ‘returns’ and make sure to frame planning discussions around how each individual client perceives their own financial issues,” Ricciardi says.

Michael Liersch (photo by Mike McGregor)

Michael Liersch, head of behavioral finance and goals-based consulting at Merrill Lynch, has also researched how FAs can develop their own checks and balances to minimize self-induced behavioral mistakes in the financial planning process.

“We’re all human and that’s a good thing,” he tells FA-IQ. “But advisors should realize that they’re in a position to practice sound investment behavior a lot more than an everyday investor.”

As a result, Liersch recommends that even more experienced FAs take time to double-check their own assumptions about how to build trust.

“It’s extremely important that they realize all of this practice gives them a greater ability to become aware of making objective decisions – ones that are in line with what their clients really want to accomplish,” he says.

One of the biggest issues Liersch sees relates to what he refers to as anchoring. “People are anchored to their own viewpoints – it’s the starting point for all human interactions,” he says.

To create more “objectivity” in the planning process, Merrill’s behavioral expert urges FAs to put more time and effort into making sure their “investment personality” questionnaires really help flush out clients' feelings about money.

Along those lines, Liersch says he also likes to work with advisors on how they prioritize goals.

“One of the benefits of profiling clients’ personalities and developing a list of their goals is to help advisors make sure they’re not filtering out any questions by making too many assumptions based on their own set of beliefs,” he says.

Jonathan Blau, chief executive at Fusion Family Wealth in Woodbury, N.Y., is an advisor who believes in watching his own behavioral “foibles” as much as those of his clients.

The veteran FA, whose firm manages $620 million, says he’s careful to remember that an "effective" communications strategy is key to building strong relationships with families.

“When meeting a new client or prospect, I find it’s important to set basic parameters of how our firm likes to work with people,” Blau says.

That not only lets him get a better reading on someone’s own financial situation, he adds, but also spells out to clients his own preferred method of planning. He follows up on a regular basis to let them know exactly what he’s doing.

“To me, taking more control of client relationships comes down to a matter of focusing on providing ongoing education and less about interjecting your own personal biases and conclusions into conversations,” Blau says.

As a result, he urges advisors on his staff to understand successful strategic investing isn’t a question of timing and securities selection. “Instead, we see success in financial planning as a question of how well our advisors are at managing temperament – both their clients’ as well as their own.”