In surveys by a wealth management tech services firm, 26% of advisors ranked “overconfidence” – that is, the tendency to overestimate their own skills and accuracy – as the top behavior that affects their decisionmaking. “Regret avoidance” was a close second, at 21%.
“Advisors are human, too,” says John Anderson, the firm’s Managing Director and Head of Practice Management Solutions at SEI’s Independent Advisor Solutions group. “Recognizing their own biases and taking proactive steps to keep them in check will foster trust and open dialogue with clients, which is essential to an advisor’s business success in any market environment.”
The surveys revealed disconnects in clients’ and advisors’ perceptions and discussions about risk. Measuring risk can be complex and not intuitive for most investors, highlighting a discrepancy between how advisors and clients view risk. In addition, the report notes, clients’ perceptions of risk are often driven by emotions and can be easily misunderstood or discounted by advisors, who typically take a strictly rational approach. The is means that risk profiling questions should be worded carefully to assess the client’s attitudes without introducing both advisor and investor biases, SEI suggests.
“It’s important for advisors to understand risk along two dimensions: market risk and shortfall risk,” says J. Womack, Managing Director of Investment Solutions in Anderson’s Advisor Solutions group. “By shifting the client’s focus from benchmark performance to what it means if they cannot retire at 65 years old, the client and advisor can avoid knee-jerk reactions to short-term market movements, and instead focus on the end-game with full transparency.”
SEI’s research also indicated that the term “goals-based” may be used too liberally by advisors. A majority of advisors (59%) said they believe they’re implementing a goals-based framework, with nearly all (86%) stating they align individual portfolios with individual goals. However, more than half (52%) of those advisors manage only one or two portfolios per client, while a true goals-based wealth management approach builds multiple portfolios, each of which aligns with an individual goal.
In SEI’s view, in a true goals-based wealth management framework, traditional advisor-driven wealth management is replaced with co-planning and ongoing client-advisor engagement, supported by technology. Placing the client at the center of the conversation, with the advisor serving as coach, is vital, the report asserts, citing research from Morningstar showing a positive impact on portfolio performance averaging 150 basis points.
A report based on SEI’s research, “Coaching Through Biases—Yours and Your Clients” (free, but registration is required), covers the study’s full findings and offers steps for advisors to take in implementing co-planning strategies and a full goals-based wealth management approach.
SEI’s financial advisor data came from 608 responses to the firm’s 2019 Financial Advisor Survey conducted in April 2019. The investor data used in the study came from a joint effort with Phoenix Marketing International that surveyed 1,000 affluent U.S. households in March 2019 to learn more about their behavior in volatile markets. Filtering out self-directed investors resulted in 653 responses representing households with $100,000 to $5 million in investable assets.