They say bias and prejudice are attitudes to be kept in hand, not attitudes to be avoided.
That is why it is important to recognise how biases impact the way people invest, so investors can be educated to make better decisions.
This is according to Daniel Williams, independent financial adviser at Morgan Williams and Co, who says: “Our approach is focused on client education, helping them to understand the decisions they are making, essentially bringing them on the planning journey with us.
"The better the client's understanding of how the solution meets their objectives, and helps them to achieve their goals, the higher the chance the client will avoid making behavioural mistakes.
"Better understanding ultimately, in our experience, leads to better client outcomes. We have built a series of presentations that help with this education piece, and in my view it's one of the most important parts in the advice journey.”
Classical financial theory assumes investors are rational. But a rational investor that makes decisions without any emotional interference exists only in theory. In reality, every individual’s decisions and risk-taking behaviours are influenced by their own psychology, emotions and personal experience.
But how can advisers help clients with decision-making by recognising these biases?
Antonia Medlicott, founder at Investing Insiders UK, says obtaining good knowledge of behavioural finance is the key to success.
She says: "We all know that decisions about money are best approached rationally, using facts and evidence. We espouse the benefits of an evidence-based approach, where things are based on long-term research and observations of the market. The trouble is, we also know that, as humans, we don’t always act rationally.
“Financial advisers and planners who have a good knowledge of behavioural finance can have that kind of in-depth discussion with their client, which means they're able to understand how clients' past experiences with money and investing have shaped their current attitudes and values.
"The aim is to help clients see their own biases, rather than trying to persuade or convince them to do what you think the rational decision is; it's about helping them get there themselves.
“It may also be about helping clients understand the opportunity cost. There are no options without risk."
Clarity around volatility
James Dalby, investment services lead at Aviva, agrees that the best thing advisers can do is show the long-term benefits of investing.
He added: “That means being clear about the ups and downs that investors will see over the long-term. The old adage of ‘time in the market’ rather than ‘timing the market’ comes into play here, and the reality is that most events that cause a downward move in asset prices do, over time, become less of a concern as markets typically recover.
