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2 min read

How Advisors Can Manage Behavioral Bias

How Advisors Can Manage Behavioral Bias

For advisors to be successful, they need to be able to manage their “emotional reflex system” when volatile events happen.

They can’t control the markets, but they can manage their reaction to them.  And the same goes for how they engage their client.

Whether you are an advisor or an investor, behavioral bias is something you want to avoid. It can be mitigated by developing a strong and healthy Financial EQ. In other words, you must learn how to manage the emotional element of financial decisions for better outcomes.

According to Carl Richards in his book The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money

"It's not that we're dumb. We're wired to avoid pain and pursue pleasure and security. It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right, but it's not rational."


Here are some questions to ask yourself:

  • Why do some advisors repeatedly lose wealth and others accumulate it?
  • Why, after developing investment goals, do some advisors then revert to knee-jerk reactions that may hurt returns?
  • Is there more to advisors than just analyzing numbers and making decisions to buy and sell various assets and securities?
  • How aware of their own behavioral biases are advisors?


Now, ask the same questions of your clients.

Behavioral bias doesn’t only apply to advisors, but also to their clients. So, it is incredibly helpful when guiding them if you know what they bring to the table. Their thinking and actions are influenced by the same set of factors and biases that affect advisors in the financial decision-making process.

To learn more about personal decision-making behavior, both advisors and clients can utilize the DNA Natural Behavior Discovery Process. The self-awareness that it provides can help you avoid making investment mistakes and build stronger advisor-client relationships. The easy-to-use web app will uncover goals, priorities, biases, and more.

 

Tips for Managing Behavioral Bias

  1. Acknowledge that behavioral biases are inherent to everyone.

    - Identify emotional triggers, the inherent ‘go to’ decision-making process, under pressure.

  2. Never assume that you are not biased.

    - As an advisor or an investor (driven by reputation, compensation, building a business, or managing expectations), you will make different decisions under pressure than when you are in a learned, calm, and logical mindset.

  3. Keep your goals and financial capacity in focus. Consider the big picture.

    - This path to success will keep knee-jerk reactions from disrupting progress.

  4. Everyone has an inherent hard-wired behavioral style, which is the core of who they are, and emotional reactions can be predicted, with the right tools.

    - Take a moment to complete a simple discovery process that can uncover life-changing behavioral insight.

  5. Communication is the key.

    - You must understand how to uncover a someone’s unique communication and learning style to build trust.

    - Aligning advisors with clients according to behavior style will close gaps in communicating as well as decision-making.

Behavioral psychologists have long understood that people are not entirely rational. We’re influenced by a range of factors, from emotion to inherent behavioral biases, which may make a less rational choice seem more appealing. If advisors are to understand the behavior gap that will exist between themselves and their clients, they need to be fully aware of these biases. Gaining this insight will deliver more effective and informed decision-making, which will stand up under market pressure.

If you’d like to learn more about behavior bias, be sure to check out our videos on YouTube.

 

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