By understanding the client’s familiarity with financial markets, the adviser is better able to identify their susceptibility to displaying behavioural biases and can then provide tailored and relevant support. While the most rational investor will convince themselves that they will sit tight in times of investment turmoil, the reality is often different.
Asking questions that establish a client’s level of self-efficacy, their belief in their abilities to manage their finances in order to achieve their ultimate financial goals, as well as their resilience and emotional stability, can identify their level of risk composure.
If someone is worried about running out of money in retirement, for example, it can be a good predictor of negative reactions in periods of adversity, and could potentially lead clients to sell their positions at the bottom of the market. Helping clients to think about this possibility upfront can prepare them to stay the course.
4. Sustainability preferences.
Given their aim of optimising returns, many advisers overemphasise the importance clients place on returns alone, disregarding their personal values. In fact, investors are increasingly illustrating that they care about a company’s impact on both the environment and society at large.
Evidence from multiple sources indicates that sustainability-oriented investments are of at least moderate importance for 70 to 80 per cent of investors.
Measures to understand sustainability preferences are necessary as advisers consider investment suitability, but they must not simply gauge whether a client is either pro-sustainability or pro-returns – the personal, emotional and social reasons behind sustainability preferences should also be explored.
For a nervous client, an adviser who takes the time to understand all the factors contributing to the investment decision-making process – not only risk appetite and return requirements – can be reassuring.
Measuring attitudes holistically through a robust and standardised process allows the financial planner to be well informed not only about the client’s levels of risk tolerance, but also their emotional resilience, capability and confidence in managing their finances.
The role of an adviser in building resilience
Given that new investors are particularly prone to exhibiting behavioural biases when making investment decisions, it is more important than ever for the adviser to educate the client around these biases and their potential to influence risk tolerance and expectations during the investment journey.
According to a famous model in psychology, sometimes known as the ‘big five’, there are five essential traits that define our personality: our levels of extraversion, agreeableness, openness to experience, conscientiousness and neuroticism.
These personality traits – in addition to mood, financial knowledge, motivation and intellectual ability – can influence our susceptibility to behavioural biases.
Understanding how personality traits and behavioural biases impact investment decisions and taking measures to counteract them can reduce the likelihood of investors making poor investment choices, while also positively impacting market fragility on a wider scale.
