Advisors weigh in on clients' self-defeating biases

A new survey sheds light on the behavioural issues that lead to harmful investment decisions

Advisors weigh in on clients' self-defeating biases

Advisors who want to prove their value to clients, especially through coaching and guidance, will surely be interested in new research on the behavioural biases that drive investment mistakes.

The BeFi Barometer 2019 survey, sponsored by Charles Schwab Investment Management (CSIM) in collaboration with the Investments & Wealth Institute, polled over 300 financial advisors in the U.S. The advisors, all members of the institute, were diversified across business models including wirehouse, registered investment advisor (RIA), and national/regional broker dealers.

The survey found that the five most common shortfalls that hurt clients’ decision-making capabilities are:

  • Recency bias (cited by 35% of advisors) – assigning disproportionate significance to recent news;
  • Loss aversion bias (26%) – accepting less risk than can be tolerated;
  • Confirmation bias (25%) – seeking information that bolsters their previously-held notions;
  • Familiarity/home bias (24%) – preferring to invest in domestic companies or companies they already know well; and
  • Anchoring bias (24%) – Fixating on specific reference points, such as the initial price paid or the performance of a specific index, when making investment decisions.

Read also: IFIC wants you to behave better on this key topic

The survey results also suggest that susceptibility to specific behavioural biases also varies according to client age. In particular, millennials — those under 38 years old — were most likely to be reported as prone to framing bias (making decisions based on how information is presented). Generation X, who fall between 38 and 53 years old, were purportedly most prone to recency bias, while baby boomers who were anywhere from 54 to 72 years old were most likely to struggle with anchoring. Finally, members of the silent generation were said to suffer most from familiarity/home bias.

In order to neutralize the harmful effects of such predispositions, the report found that helping clients take a long-term view was a “very effective” strategy among 62% of advisors. Eliminating emotional decision-making through the use of a systematic process, such as automatic rebalancing, was identified by 52%. Nearly half of respondents (47%) were also inclined toward goals-based planning, with clients’ wealth being divided into different accounts and managed based on specific priorities such as retirement saving and home ownership.

Other bias mitigation techniques cited in the report were:

  • Uncovering emotional triggers (39%);
  • Increasing portfolio diversification (37%);
  • Cautioning investors to stay calm (35%);
  • Reducing news intake (21%);
  • Suggesting risk targeting (18%);
  • Reducing investment expenses (16%); and
  • Considering past outcomes (12%).


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