Do Your Clients Make These Behavioral Blunders?

By Crucial Clips     February 6, 2019
The following text is a transcript of a portion of a speaker's presentation made at an industry conference or during an interview. This transcript solely represents the view of the individual who spoke, and not the view of Financial Advisor IQ or any other group.
Source: FAIQ @ Schwab Impact Conf, Oct. 30, 2018 

GARRETT KEYES, REPORTER, FINANCIAL ADVISOR IQ: My name is Garrett Keyes. I'm a reporter for a Financial Advisor IQ. And we're here at Charles Schwab Impact Conference with Omar Aguilar, the Chief Investment Officer of Equities for Charles Schwab. Omar, what behavioral mistakes do advisors often see from their clients?

OMAR AGUILAR, SVP & CIO, EQUITIES AND MULTI ASSET STRATEGIES, CHARLES SCHWAB INVESTMENT MANAGEMENT: Well, this is a very good question and very timely especially because we are in this part of the market where volatility is starting to increase. So a lot of behavioral biases, that we all have as humans, start to emerge. When you have a bull market, we can live with a lot of these biases. But it's really the times of stress in the market where all these biases come about.

So we recently did a study at Charles Schwab Investment Management. We asked advisors about their behavioral biases for their clients and what they observe. And the three that ended up being at the top was availability bias, confirmation bias, and loss aversion. Those were very typical behavioral anomalies and biases that most clients observe.

Let me start explaining a little bit of that. In behavioral finance, there's two types of biases. The ones that are emotional: those tend to be the ones that are part of our inner brain where we just react to things. And we don't even know why, but we emotionally get attached to certain things. And also there are the cognitive biases that tend to be more related to data and tend to be a more the rational part of the brain where we convince ourselves that things are going a certain way.

So the three things that I mentioned: availability bias. Availability bias is the bias that humans have when you just find information that is easily available. We don't do any more research, but we just find out whatever is available, and then we ended up using those. So it's very typical. Especially in a bull market. You just see green on the screen. You see green on the screen. And your next decision is I'm going to buy more. That's very typical availability bias.

Confirmation bias: Confirmation bias is that you make a decision, but then you look around to figure out how you can confirm your decision to convince yourself that it was the right one. Very typical again in a bull market where you actually see -- once you make a purchase, you realize well I need to convince myself it is the right time. Dollar averages. You can actually make a lot of decisions based on just that piece.

And the last one is loss aversion. Loss aversion, it is more emotional. That's really when you start feeling the pressure of higher volatility. You're just starting to get worried about things. That's a little bit more consistent where we are now in the market, especially when volatility picks up where people tend to be more emotionally attached that they don't want to lose money. So those are the typical things that advisors have seen in their investors.

GARRETT KEYES: What challenges do these behavioral mistakes pose for clients' portfolios if advisors don't work with them to correct them?

OMAR AGUILAR: Well, that's a great question. So a big part of the role of the advisor is to try to find that middle point between what the client needs, which is usually what advisors know. Advisors are very good in knowing what are the needs of a client. They know their date. They know their age. They know their circumstance. Their wealth. Their goals. And usually they're pretty good at understanding what they need.

But on the other hand, you have what the client wants. So finding that happy medium between what they need and what they want is really the role of the advisor. The emotional component on the cognitive biases usually tend to be affecting the clients on what they want. In many cases, even if they have the possibility, they will tend to be biased towards certain types of investments.

And that's something where the advisors can play a big role in trying to find that happy medium where they say, well you may want that, but either it's too risky for you or too conservative for you. And this is what you really need. And try to find something that at some point will actually be closer to what they want, but doesn't necessarily sacrifice what they need. I think that's a big part of the challenge of what advisors have to do. That at the end if they do it right, they can actually have more longer-term relationships with their clients.

GARRETT KEYES: Thank you for joining me today, Omar.

OMAR AGUILAR: Oh no problem. Anytime.