Advisers have been integrating behavioural economics into their advice process to help gauge clients’ investment strategy better.
Ben Willis, head of research for Bristol-based Whitechurch Financial Consultants, said it was important to apply the thinking behind behavioural finance when creating investment portfolios.
He tries to avoid a herd mentality when compiling portfolios for clients. “It’s not about being contrarian for contrarianism’s sake, but we do need to avoid areas being driven purely by sentiment.”
Mr Willis said he also tries to watch out for emotional behaviours, such as confirmation bias and anchoring - whereby investors stick with their beloved stocks even when the fundamentals do not look good.
To counteract this, his four-strong investment team challenges each other’s thinking about a certain holding.
“Some investors could become anchored to a particular position even if it has made some losses, convinced the investment is still attractive or could get better, but in reality the holding could be a value trap.”
He added this was where having a committee approach worked well, to challenge the assumptions of team members should one member become entrenched in a certain way of thinking about a holding.
Mr Willis made his comments as a survey carried out on Twitter by @FTATalkingPoint - a new editorial partnership from FTAdviser and Schroders - revealed 100 per cent of advisers said their clients had displayed some measure of fear in the immediate aftermath of the vote to leave the European Union.
Advisers claimed their clients wanted to indulge in the sentiment-driven “flight to safety” and dive into safer haven asset classes, such as dollar-denominated money market funds.
But, as Mr Willis said: “We’re all human and can fall foul of behavioural finance as we can be driven by sentiment.”
Another poll carried out by @FTATalkingPoint found 36 per cent of advisers responding to the survey have already been using behavioural economics as part of the advice process.
Some 27 per cent of advisers said they were considering starting to use the approach within the investment advice process.
A CPD-qualifying feature for @FTATalkingPoint, on Avoiding behavioural biases when advising clients, has outlined various common behavioural traits.
These include:
• Do not fall in love with a certain stock.
• Do not make rash decisions.
• Do not buy the flavour of the month.
• Do not be dogmatic.
• Learn from your mistakes.
Mr Willis added: “From our point of view it is a challenge, as clients sometimes get entangled in recognised areas where human behaviour has an effect on our financial decisions.
“Sometimes advisers have to have a difficult conversation explaining why the fund may not continue to perform, why it is best to bank profits and look for the next opportunity.”
Find out More
To find out more, visit the FTAdviser Talking Point page, read the in-depth report on behavioural finance here, and join us on Twitter at @FTATalkingPoint.
