Human psychology can impair the economic decisions we make every day and advisers are best-placed to steer clients away from making big errors.
Stuart Podmore, investment propositions director for Schroders, said at its core, the human condition can affect investment decisions.
“You see the effect of this manifested in market movements and, critically for our adviser clients, the end consumers can display these traits too.”
When it comes to investment managers, Mr Podmore said it was useful but not something that Schroders’ fund managers all followed rigidly.
He said: “We do not have one process that says: ‘here’s our behavioural finance principles and we follow this strictly’.
“But the principles of this permeate much of our investment processes. What springs to mind is the value perspective.
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“Think about it. One describes a value manager as one who has to take an unemotional appraisal of risk and return. The essence of this is based on behavioural finance principles.
“The fact is behaviour and sentiment can move markets, but because managers make decisions based on pure valuations, as a result of these market anomalies we believe we can take advantage of those movements and generate alpha for our clients.”
Mr Podmore added advisers could also start to apply these principles to their client conversations.
He said: “Sometimes people think of behavioural finance applying to processes and professionals but it applies to all of us - consumers and, ultimately, all of us, because we all suffer from the human condition.
“I think those advisers who can spot behavioural bias in their clients and then, importantly, engage with their clients and talk to them about it so they don’t impair their investment decisions, are at an advantage over their competition.”
He said advisers should have a good idea of the theory, and then be able to spot the “tell-tale signs”, especially as clients often say and do different things.
Find out more
Visit FTA Talking Point to read the latest updates on sentiment and equity markets, and click here to read an in-depth report on Behavioural Finance, which qualifies for 30 minutes of structured CPD.
