How Advisor Biases Influence Client Outcomes: SEI Study

Advisors, as well as investors, can be influenced by behavioral biases that affect client outcomes, according to survey findings released Thursday by SEI.

A quarter of advisors acknowledged that the tendency to overestimate their skills and accuracy was the main behavior that affected their decision making, followed by a fifth of respondents who fessed up to acting to avoid regret.

“Advisors are human, too,” John Anderson, head of practice management solutions at Independent Advisor Solutions at SEI, said in a statement.

“Recognizing their own biases and taking proactive steps to keep them in check will foster trust and open dialogue with clients, which is essential to an advisor’s business success in any market environment.”

The surveys showed that biases are just one consideration in the advisor-client relationship. Besides differences in clients’ and advisors’ expected behaviors during bouts of market volatility, disconnects exist in the perceptions and discussions around risk.

SEI said risk profiling questions should be worded carefully to assess the client’s attitudes without introducing both advisor and investor biases. It noted that emotions often drive client perceptions of risk, and can be easily misunderstood or discounted by advisors who typically take a strictly rational approach.

The research was based on a survey of 608 advisors conducted in April, and of 653 U.S. households conducted by Phoenix Marketing International in March. The latter respondents had investable assets ranging from $100,000 to $249,999 on the low end to $1 million to $5 million on the high end.

Measuring risk can be complex and is not intuitive for most investors, highlighting a discrepancy between how advisors and clients view risk, SEI said.

“It’s important for advisors to understand risk along two dimensions: market risk and shortfall risk,” J. Womack, managing director of investment solutions at Independent Advisor Solutions, said in the statement.