The industry consensus on why financial advice is valuable has changed.
No longer is an adviser’s worth solely linked to his ability to beat a benchmark, it’s also measured by the impact that their services can have on financial outcomes and ability to hand-hold an investor during turbulent phases, when panic hits. In a bull market, clients tend to become return-oriented by ignoring asset allocation and their risk appetite. Advisers need to continually reinforce the long-term benefits of an actively managed approach that will mitigate risk when the market turns topsy-turvy.
New metrics and research findings show that the interpersonal aspect of advice may have more impact on a person’s finances than anything else. This outlook favors services like behavioral coaching—helping clients mitigate their biases and stay the course, and personalized advice versus traditional selling points like maximizing returns and asset allocation.
Investors are known to face biases like confirmation bias, herding behavior, loss aversion and anchoring. In recent years, there has been a slew of research concerning the biases that advisers exhibit as well. Although advisers and other professionals are highly experienced and skilled in their trade, they are not immune to the everyday behavioral biases we all face.
They can make mistakes in investment judgment, process, or implementation, and can fall prey to herd mentality, prompted by the behavior of clients or their peers. Overconfidence is one such cognitive bias that often affects advisers. Although it’s not possible for someone to avoid all behavioral biases, planners need to understand these instincts better to help them in advising clients who are facing the same issues.
Morningstar’s research shows that the interpersonal side of advice, which includes personalization and behavioral coaching, can be the most valuable aspect of professional advice, and the industry needs to better articulate that. Contemporary advice is more coaching than stock-picking, and returns are only part of the picture.
To learn how you can overcome biases, join us to interact with Steve Wendel, Head of Behavioral Science, Morningstar at the Sahara Star Hotel in Mumbai on May 30. Register here.