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Financial Planning > Behavioral Finance

How Behavioral Finance Can Help Clients and Advisors

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Financial advisors are increasing their use of behavioral finance techniques when dealing with clients and reaping the rewards.

According to the second edition of an annual survey from Charles Schwab Investment Management (CSIM) and the Investments & Wealth Institute, conducted by Cerulli Associates, 81% of over 300 advisors said they’re using behavioral  finance techniques in client communications and interactions, compared to 71% a year ago.

Sixty-two percent used such techniques for portfolio construction, up from 58% a year ago. 

Of those using behavioral finance, the majority  62%  reported adding new clients, double the level of advisors who didn’t use such techniques. About  two-thirds of new clients for both advisors groups said they’d become dissatisfied with their previous advisors or wanted to consolidate their accounts.

The Cerulli survey was conducted in May and June after the stock market had begun its steep recovery from the pummeling it took in the first quarter. It relied on self-reporting from advisors, who were roughly evenly split among those working with wirehouse firms, RIAs and national or regional broker-dealers.

The big increase in advisors’ use of behavioral finance in client communications reflects their intensified efforts to help clients deal with the increased market uncertainty and life overall in this pandemic year, according to the Cerulli report on the survey results.

Benefits of Behavioral Finance

Advisors using behavioral finance techniques were better prepared for this year’s extreme market volatility, said Omar Aguilar, chief investment office of passive equities and multi-asset strategies at CSIM.

Such advisors are more likely not only to educate clients about potential market volatility but also to urge clients to expect it, according to the Cerulli report.

“Behavioral finance is always relevant, but this moment really brings to life the impact it can have on an advisor’s practice, ‘ said Asher Cheses, research analyst for high net worth at Cerulli Associates, in a statement. 

Advisors using  behavioral finance techniques were more engaged in tax-loss harvesting and increasing allocations to active managers than non-users. The latter focused more on reducing investment risk and increasing downside protection through options and derivatives, according to the survey.

The report also described the changes in advisor and client biases, which underpin behavioral finance, between this year and last year. More advisors reported loss aversion bias this year compared to last (40% vs. 29%), as well as overconfidence (26% vs. 17%) and confirmation bias, which views new evidence as confirmation of one’s existing beliefs (14% vs. 9%).

Advisors reported that investors also showed more loss aversion bias this year compared to last, as well as more familiarity basis (invest in what they know), framing bias (where reaction to information is based on how it’s presented) and mental accounting bias (using personal, subjective criteria) but the percentages were 30% or lower for each.

However, advisors also said investors’ recency bias, which favors recent events over historic ones, reached almost 35% this year, in line with last year’s level.


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