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