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Advisors See Sharp Increase in Behavioral Biases Among Clients: Schwab

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What You Need to Know

  • COVID-19, volatility and interest in crypto assets fueled the increase, according to the latest BeFi Barometer from Schwab, Cerulli and the Investments & Wealth Institute.
  • The latest survey found an increase in advisors who said techniques to manage investors' biases were effective.
  • Schwab Asset Management, Investments & Wealth Institute and Cerulli Associates collaborated on the report.

Despite strong market gains over the past year, investors have been having a hard time keeping in check the biases that could derail their gains or badly position their portfolios for the future.

According to the latest behavioral finance (BeFi) barometer from Schwab Asset Management, advisors observed a sharp rise in behavioral biases in their clients over the past year due to the COVID-19 pandemic, increased market volatility and the frenetic trading of meme stocks and cryptocurrencies. These nerve-wracking developments for many investors suggest the importance of incorporating behavioral finance principles into advisor practices.

The study measured the share of advisors who noticed each bias to a “significant” degree among their clients.

The share of advisors reporting significant levels of recency bias — the influence of recent events — rose to 58% from 35% last year, and those reporting confirmation bias, which is the tendency to interpret new evidence as confirming what one already believes, rose to 50% from 24% previously.

BeFi Barometer: Client Biases

In contrast, advisors’ biases showed increased overconfidence and fewer instances of loss aversion.

BeFi Barometer: Advisor Biases

The report was based on a survey of 301 advisor members of the Investments & Wealth Institute that was conducted by Cerulli Associates in the second quarter. Respondents included advisors working at registered investment advisory firms, wirehouses and national and regional broker-dealers, and their average account size was $2 million or greater.

Offsetting the Impact of Clients’ Behavioral Biases

Advisors can help clients recognize their biases and avoid the investment mistakes that could follow by incorporating behavioral finance principles into their practices. That’s what many more advisors apparently did this year compared with 2019, according to the report.

About three-quarters of advisors surveyed said reminding clients to take a long-term view and integrating goals-based planning were effective techniques to address their clients’ behavioral biases this year compared with 62% and 47%, respectively, two years ago.

Advisors who used these mitigation techniques were able “to secure client trust and retain assets,” said Asher Cheses, associate director of wealth management at Cerulli Associates, in a statement.

Client Communications and Portfolio Construction

Advisors integrated behavioral finance principles primarily through their communications with clients (74% of those surveyed reported this), but more than half (56%) reported using those principles frequently or always in their portfolio construction for clients.

“There has never been a more critical time for advisors to incorporate behavioral finance techniques into their practices to understand and help clients stay on course to reach their long-term financial goals,” said Omar Aguilar, chief investment officer and head of investments at Schwab Asset Management, in a statement. “The combination of pandemic-driven uncertainty, market volatility and speculative investing trends have culminated in an environment where behavioral biases thrive.”

The Impact of FOMO and Appeal of Crypto

Over half the advisors surveyed said their clients asked often or very frequently asked about investments they heard about on social media. The questions related to the fear of missing out (FOMO) rather than fear of losing money. In response, over 70% of advisors surveyed said such investments were unsuitable for their clients, and 15% suggested they make a small allocation in a self-directed brokerage account.

Still, 60% of advisors surveyed reported that their clients had invested in cryptocurrencies; one-third said clients invested in special-purpose acquisition companies (SPACs); and almost one-quarter said clients had invested in meme stocks like GameStop and AMC.

Big price gains in Bitcoin, the non-correlation of crypto to other assets, easier access to crypto assets along with institutional-level support for custody purposes and investment vehicles have all contributed to the growing popularity of crypto assets among advisor clients, according to a panel that previewed the BeFi report with press. Financial advisors, in turn, have become more open to accommodating clients’ interest in crypto assets, said Cheses.

Devin Ekberg, a managing director of professional development at the Investments & Wealth Institute, explained said a lot of the barriers to invest in crypto that used to exist for advisors managing client portfolios are starting to be removed, which will continue to lead to more adoption.

Pictured: Omar Aguilar, chief investment officer and head of investments at Schwab Asset Management