Curian never ceases to stop trying to solve problems that advisors face, and managing client expectations is a big focus.
“One of the things I’ve found is that advisors believe investors only focus on performance and returns,” Keith Johnson, vice president of practice management at Denver-based managed account provider Curian Capital, says. “We know from behavioral finance that’s not always the case. The level of service, combined with the level of performance is what drives expectations.”
And that, he adds, is “where advisors are missing the boat.”
Behavioral finance is something he “loves,” he says, because it tells us so much about how investors form expectations. The tenets of behavioral finance that are particularity relevant in forming clients’ often-mistaken expectations are:
1) Anchoring — Investors set arbitrary reasons for continuing to hold a stock, even as the price tanks. “They’ll hold onto X, even if there is no good reason to hold onto X,” Johnson explains.
2) Too many choices, too many voices — With choices, investors and advisors have to have a clear direction of what to do. With voices, the listen to friends, co-workers, relatives and of course the media, the latter of which have an outsize influence on decision-making. “Everyone seems to have an uncle in the business,” he quips.