Advisors' Bias

One of the most vital roles played by financial advisors is managing behavioural biases of their clients, who are stuck between timing the market, following the herd, chasing returns, among others; thus creating substantial value over time. There is a plethora of literature available on behavioural bias affecting investment decisions and how to overcome the bias, but most of this information caters to one side of the story only, the Investor side. Apparently financial advisors too are victims of the paradigm, but seldom would they realize that the advice they deliver may also be clouted by their emotions or behavioural bias. The investors are better off as you are there to help them overcome their bias, but in case of advisors, the challenge is, it's only you who can help yourself. Hence, for an advisor keeping a check on your own emotions along with the clients', becomes paramount.

And a super way of overcoming such biases is to be aware of them, as the first step to solving a problem is understanding it. So, here are some emotional prejudices which may be dominating your judgment and decisions, needed to be taken care of.

Heuristics: Heuristics typically means applying mental shortcuts, that is processing only a part of the information received or processing the information incorrectly, when there is inflow of a large amount of data. Financial advisors too at times apply heuristics by processing partial or incorrect information while advising clients. Say for instance, the client under consideration is a young unmarried person, we may assume he has a high risk appetite, which may not be the case, and base our advice on the basis of our subjectivity. An advisor must never have a presumed background, each investor is different, we should always draw the sketch on a plain white canvas.

Industry Trend Bias: Another phenomenon that impacts advisors' judgment and the advice they deliver is market trends. Like other individuals, advisors too tend to believe that the market trend will continue. For Example, when markets are on the bull run, advisors believe that the upsurge will continue for a while and base their advice on this belief. The irony is they understand the fact that the direction of the markets cannot be predicted, yet they get influenced by trends. Even if it is highly likely that the bull trend will continue, yet it's wrong to base your decision on the likeliness. You never know the markets might start correcting from the next day. Take the example of the recent bit-coin rally and the subsequent downturn, when the coin was taking giant leaps and surged to US$15,000 levels, people started believing the trend will continue for at least some time, until the coin's pace was thwarted and it changed course.

Familiarity Bias: Another cognitive bias often seen in advisors is tendency to prefer familiar, tried and tested products. Real Estate or Gold can be a good example of the Familiarity Bias. Because people were familiar with these asset classes, they did not look beyond them, and both sectors witnessed sluggish growth over the last decade.

Familiarity Bias in advisors has two drawbacks:

1. Lack of proper diversification in the client's Portfolio. Your preference for let's say equity, will result in over concentration of Equity in the client's Portfolio.

2. Unable to meet specific needs. The investor who is looking to invest in a product, which isn't your forte, may not get the solution from your end.

Anchoring: Anchoring is one of the most common behavioral bias, witnessed in both, advisors as well as investors. Anchoring means when we consider our past experience as a foundation to base our future decisions on. And it is very difficult to modify our perceptions of products based on our first experience. We may have had a pleasant experience with a particular sector in the past, and there are chances we may have anchored the episode to the extent that all our clients have that particular sector in their Portfolios, irrespective of it's relevance in the Portfolio.

So these were some of the most common behavioural biases, among others, witnessed in financial advisors. The crux is it's not just our investors who are not letting go their emotions and biases while investment decision making, quite often we advisors might also be influencing our clients' portfolios with our emotional biases. It is extremely important for advisors to understand these biases and get over them, and deliver fair advice, which is unaffected by judgments or prejudices. It is a continuous task to guard yourself and them against bias.

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