How Advisors Can Defeat Bias

Like it or not, possessing biases is simply part of human nature. However, investing is one pursuit in which bias are not only expose, but can act as detriments.

For example, advisors and do-it-yourself investors alike have long displayed predilections toward domestic large-cap equities while eschewing small-caps and foreign stocks, sometimes at the expense of strong returns. Translation: Biases can be costly, but since many are so entrenched and represent old behaviors and schools of thought, defeating them is easier said than done.

Biases are like any other problem in that the first step toward improvement is acknowledging there’s a problem in the first place. Obviously, that takes some level of self-awareness and that starts with acknowledging that no one – no matter how successful – is perfect. And while those that aim for perfection will find it to be a moving target, there are easy-to-implement strategies for eliminating biases and scoring small, but important victories that can benefit a practice and clients.

Good News Regarding Biases

For advisors that are struggling with biases, there are silver linings.

“The good news is that learning about our biases is the first step toward overcoming them. Cerulli (in partnership with Charles Schwab Investment Management Inc. and the Investments & Wealth Institute) conducted a study in 2019 to ask financial advisors to identify their biases,” notes Nationwide.

That survey is revealing on multiple fronts. For example, 82% of advisors polled feel the same regarding an investment loss as they about a gain of comparable size. Additionally, nearly two-thirds feel confident in their ability to beat the market while 54% “seek information that aligns with my perspective or current views” and more than half “allow personal experiences and/or current events to influence investment decisions.”

These aren’t outlandish behaviors, but failure to address them can hinder client outcomes. For example, various data points confirm a substantial majority of clients approve of advisors deploying model portfolios and even more are unlikely to leave their advisor because of model portfolios. By outsourcing portfolio management, advisors can spend more time building the practice and nurturing client relationships. Yet, as noted by the Schwab survey, nearly two-thirds of advisors insist they can beat the market. That’s just one example, but it underscores the point that an advisors with biases needs to own them.

“If you have a bias, own it, and then decide if doing something about it works for you. Or if you choose to do nothing, consider what the consequences of inaction might be,” adds Nationwide. “Athletes identify what they need to work on and then create and follow a discipline to improve and make course corrections along the way. As a financial professional, you can use this same type of discipline to work on your biases by first identifying them and then finding strategies to help you overcome them.”

Vanquishing Biases for Good

Critical in the fight against biases is acknowledging that biases are born out of personal experiences and that an advisor’s life experiences probably aren’t carbon copies of his or her clients.

Additionally, recency plays a pivotal role in this equation. Yes, advisors should stay abreast of geopolitical events and domestic politics for the sake of broader market oversight, but how person A views those events can very differ from how person B interprets them.

“This recency effect might be one of the most difficult to overcome because of the proliferation of information at our fingertips, coming at us through all types of media. It’s an understandable tendency to react to the latest news that supports your desired perspective (i.e., confirmation bias once again). Stock market trading is a good example of witnessing recency bias when we place more weight on the most recent positives vs. looking at a particular stock’s long-term history in the market,” concludes Nationwide.

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