Advisors incorporating behavioral finance
methods into practice have gained more clients in a challenging
2020
More 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
2019
2020
Client communications / interactions
71%
81%
Portfolio construction
58%
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
User
Non-User
All
Maintained strategic allocation
50%
59%
53%
Used opportunity to use tax-loss
harvesting
53%
44%
50%
Made incremental additions to depreciated
asset classes
37%
38%
38%
Increased allocations to active managers
who may outperform given current conditions
28%
22%
26%
Reduced risk assets/moved money into safer
investments
23%
29%
25%
Increased individual stock allocations
22%
19%
21%
Increased downside protection (e.g.,
derivatives/options)
14%
23%
18%
Moved assets to lower-cost (passive)
options
9%
3%
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…
2019
2020
Recency Bias: Easily influenced by
recent news events or experiences
35%
35%
Loss Aversion: Playing it safe or
accepting less risk than they should tolerate
26%
30%
Familiarity/Home Bias: Preference
to invest in familiar (U.S. domiciled) companies
24%
27%
Framing: Make decisions based on
the way the information is presented
17%
26%
Mental Accounting: Separating
wealth into different buckets based on financial goals
15%
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.
About the Study
Charles Schwab Investment Management, in collaboration with the
Investments & Wealth Institute (IWI), retained Cerulli
Associates, a leading independent market research and consulting
firm, to learn how advisors view and use behavioral finance when
working with clients. This second edition of the survey, the BeFi
Barometer 2020, was conducted by Cerulli Associates in May and June
2020 and reflects the views of over 300 advisor members of the IWI.
Respondents were diversified among business models including
Wirehouse, Registered Investment Advisor (RIA), and
National/Regional broker dealers. All data is self-reported by
survey participants and is not verified or validated.
About Cerulli Associates
Headquartered in Boston with offices in London and Singapore,
Cerulli Associates is a global research and consulting firm that
provides financial institutions with guidance in strategic
positioning and new business development. Our analysts blend
industry knowledge, original research, and data analysis to bring
perspective to current market conditions and forecasts for future
developments. Cerulli's research product line includes the Cerulli
Report series, the Cerulli Edge series, and Cerulli Lodestar.
About Charles Schwab Investment Management, Inc.
With a straightforward lineup of core products and solutions for
building the foundation of a portfolio, Charles Schwab Investment
Management advocates for investors of all sizes with a steadfast
focus on lowering costs and reducing unnecessary complexity. As of
June 30, 2020, Charles Schwab Investment Management managed
approximately $524.7 billion on a discretionary basis and
approximately $16.9 billion on a non-discretionary basis. More
information is available at www.schwabfunds.com.
About the Investments & Wealth Institute®
Established in 1985, the Investments & Wealth Institute,
formerly IMCA, is a professional association, advanced education
provider, and standards body for financial advisors, investment
consultants, financial planners, and wealth managers who embrace
excellence and ethics. Investments & Wealth Institute
administers three certifications, Certified Investment Management
Analyst® (CIMA®), Certified Private Wealth Advisor® (CPWA®), and
Retirement Management Advisor® (RMA®). Through its publications,
live events, online courses, assessment-based certificate programs,
and advanced certifications, the Institute delivers
premier-quality, practical education to advanced practitioners in
more than 39 countries.
CSIM is not affiliated with Cerulli Associates or the
Investments & Wealth Institute.
(0920-0M1H)
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version on businesswire.com: https://www.businesswire.com/news/home/20200908005142/en/
Karleen Fallon Cerulli Associates 617-841-1005
kfallon@cerulli.com
Erin Montgomery Charles Schwab Investment Management, Inc.
212-403-9271 erin.montgomery@schwab.com
Devon Coquillard Investments & Wealth Institute 303-850-3202
dcoquillard@i-w.org
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