Unlock Success with Behavioral Finance Techniques: IWI Insights

Posted by Allison Edmondson, Director of Communications

Sep 8, 2020 3:00:00 PM

Denver, CO — September 8, 2020More financial advisors are using behavioral finance techniques compared to last year – and they are reaping the benefits, according to the BeFi Barometer 2020, the second edition of the survey commissioned by Charles Schwab Investment Management, Inc. (CSIM) in collaboration with the Investments & Wealth Institute and Cerulli Associates. Eighty-one percent of advisors surveyed said they are using behavioral finance techniques in client communications and interactions, up from 71 percent a year ago. Behavioral finance users said it helped them keep existing clients invested during this year’s unprecedented volatility, and 66 percent reported gaining clients since the first quarter of 2020 compared to only 36 percent of advisors who do not use these techniques.
“Advisors are guiding clients through an unprecedented market environment and emotions are running high,” said Omar Aguilar, PhD, Chief Investment Officer of Passive Equities and Multi-Asset Strategies at CSIM and a practitioner of behavioral finance in asset management for over 20 years. “Keeping clients focused on long-term plans and goals while mitigating their own biases through the uncertainty we are experiencing today is no small task. Keeping a disciplined approach and a clear communication plan are critical elements to helping clients achieve their financial goals. It is exciting to see that advisors are recognizing the value of putting behavioral finance concepts into their practice.”

The Benefits of Behavioral Finance

Against the backdrop of increased market volatility in early 2020, advisors reported the greatest benefits of using behavioral finance included:

  • Kept clients invested during market volatility (55%)

  • Strengthened trust and relationship with clients / increasing client retention (48%)

  • Better managed client expectations through effective communication (40%)

  • Reduced short-term or emotional decision making (37%)

  • Developed better understanding of clients comfort levels with risk (33%)

Behavioral Finance blossoms in advisor practices

Advisors are increasingly incorporating behavioral finance within the context of client communications and portfolio construction.

Frequently / Always use behavioral finance
Client communications / interactions
2019 71%
2020 81%

Portfolio construction
2019 58%
2020 62%

Notably, those who use behavioral finance were almost twice as likely to gain clients after the first quarter of 2020 as advisors who did not use behavioral finance (66% vs 36%).
“Behavioral finance is always relevant, but this moment really brings to life the impact it can have on an advisor’s practice,” said Asher Cheses, Research Analyst, High-Net-Worth at Cerulli Associates. “The results of this study bode well for increased adoption of behavioral finance programs going forward.”

Behavioral Finance users on the front foot

Advisors who use behavioral finance reported a greater focus on more proactive investment activity since Q1. They engaged in tax loss harvesting and increased opportunistic active investments at higher rates than non-users. Non-users were more likely to focus on reactive, de-risking activities for client portfolios, including moving money into more conservative investments and increasing downside protection.

How advisors say client investment activity changed since 1Q 2020

Maintained strategic allocation
User 50%
Non-user 59%
All 53%

Used opportunity to use tax-loss harvesting
User 53%
Non-user 44%
All 50%

Made incremental additions to depreciated asset classes
User 37%
Non-user 38%
All 38%

Increased allocations to active managers who may outperform given current conditions
User 28%
Non-user 22%
All 26%

Reduced risk assets/moved money into safer investments
User 23%
Non-user 29%
All 25%

Increased individual stock allocations
User 22%
Non-user 19%
All 21%

Increased downside protection (e.g., derivatives/options)
User 14%
Non-user 23%
All 18%

Moved assets to lower-cost (passive) options
User 9%
Non-user 3%
All 7%

“Behavioral advisors tend to make proactive changes to clients’ portfolios based on more fundamental factors like long-term financial goals, rather than transitory factors like short-term market swings,” said Devin Ekberg, CPWA®, CIMA®, CFA® , chief learning officer and managing director of professional development at the Investments & Wealth Institute. “It is exciting to see that many practitioners are living and breathing the principles of behavioral finance for the benefit of  their clients.”

Focus on Client Biases

Similar to 2019, advisors cited recency bias as the most common client bias they observe, followed by loss aversion and familiarity bias. There was also a notable increase in the number of advisors that reported clients exhibiting framing bias and mental accounting compared to last year.

Clients Significantly Exhibit…
Recency Bias: Easily influenced by recent news events or experiences
2019 35%
2020 35%

Loss Aversion: Playing it safe or accepting less risk than they should tolerate
2019 26%
2020 30%

Familiarity/Home Bias: Preference to invest in familiar (U.S. domiciled) companies
2019 24%
2020 27%

Framing: Make decisions based on the way the information is presented
2019 17%
2020 26%

Mental Accounting: Separating wealth into different buckets based on financial goals
2019 15%
2020 26%

The full findings from the BeFi Barometer 2020 are discussed in the white paper, “The Evolving Role of Behavioral Finance in 2020,” and are available at www.schwabfunds.com/befibarometer or at https://content.investmentsandwealth.org/befi2020.


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