The past 18 months have given us all good cause to feel risk averse. Whether we have experienced bereavement, been separated from loved ones, or been forced to reassess our plans to change jobs or even retire, we have all had more worry than usual, and a lot of adjustments to make in our lives.
Research tells us that someone’s emotional state can strongly influence the financial decisions they make. New investors in particular can show signs of nervousness related to the current economic backdrop, their mental and physical health, and life events. It is therefore crucial for an adviser to understand the factors affecting a client’s level of confidence.
A financial planner with an in-depth understanding of the unique circumstances of each client not only helps to generate and protect wealth, but also supports wellbeing.
Understanding the drivers of nervousness in new investors
Covid-19 has undoubtedly made many clients more wary, bringing to light natural tendencies that have the potential to undermine good decision-making habits. An inclination to give weight to recent experiences that are freshest in our memory –referred to as recency bias – causes investors to inaccurately assess the likelihood of future events and can ultimately lead to poor investment choices.
It would be unsurprising if the economic and personal turmoil of the pandemic had led many investors to expect the future to be filled with destabilising shocks and prolonged periods of instability. Individuals with low emotional stability are particularly likely to base decisions on recent events and can often avoid reaching a decision altogether.
Another factor that can affect new investors is regret aversion bias; the tendency to place too much emphasis on the regret they may feel if they make a poor decision. Anticipating the emotional discomfort of making such a decision can result in inertia, where an investor fails to act or sticks with a default option for fear of making a choice that later turns out to be sub-optimal.
Clients’ behaviours are not only influenced by their attitudes and beliefs in their abilities, but also the views and beliefs of others. New investors can therefore be particularly prone to allowing the experiences of others to impact their emotions and behaviours.
If friends, family or colleagues have experienced financial losses during the pandemic and/or have negative views about their own investing experience, this is likely to contribute to nervousness for an inexperienced investor.
For an individual lacking financial knowledge, the idea of building a relationship with an adviser may also be intimidating. This can be an obstacle to forming the bond of trust that is essential to the client-adviser relationship.
