As Investor Assets Reach $55 Trillion, Advisors Turn to the Principles of Behavioral Finance to Acquire, Grow, and Retain Assets

October 14, 2021 — Boston

Advisors must be prepared to confront increased investor biases and engage in strategies that will lead to prudent investment decisions

Cerulli estimates U.S. investors accounted for nearly $55 trillion in total financial assets as of year-end 2020, up from $46 trillion the year prior. As investors navigate perpetual unease resulting from the pandemic, advisors should pay increased attention to clients’ emotional biases through the lens of behavioral finance to acquire, retain, and grow financial assets. According to Cerulli’s latest report, U.S. Retail Investor Advice Relationships 2021: Navigating Perpetual Unease, the use of behavioral finance techniques can help advisors retain investor trust—and assets.

Behavioral Finance Bias Descriptions and Identification Questions, 2020

Sources: Phoenix Marketing International, Cerulli Associates

According to the research, availability (91%), confirmation (80%), and recency bias (71%) are the most frequently cited biases from investors and each focus on information gathering. “The fact that investors realize they rely on things that they just read, that were easy to find, and reinforce what they already think underscores the challenge with investor ‘research,’” according to Scott Smith, director of retail investor advice relationships. “Instead of seeking out a variety of inputs from independent experts, consumers are predisposed to choose the path of least resistance.”

The research also highlights the evolution of investors’ behavioral biases with age, finding that younger investors are more likely to exhibit the tendencies that affect them. Overall, investors ages 40–49 report the highest incidence of acute behavioral bias—confirmation bias (47%) and overconfidence (42%). As advisors seek to establish relationships with an emerging affluent investor, acknowledging this underlying bias is important. “Advisors must start early to help investors understand their biases and nudge them toward better outcomes,” adds Smith.

Across the wealth spectrum, investors at the highest wealth levels—those with more than $5 million in investable assets—report elevated levels of confirmation (39%) and availability (39%) bias. “These investors have frequently made long-term decisions about the direction of their portfolios and are reluctant to be swayed by new information. While they should not overreact to short-term changes, they should also be open to the reality that the landscape of finance is one of constant evolution and refinement, necessitating ongoing portfolio oversight,” adds Smith.

As investors’ advice requirements change with age, wealth accumulation, and life experience, advice providers should consistently offer guidance to serve those who eventually recognize that accepting advice is wise. “Increased attention to clients’ emotional biases through the lens of behavioral finance can be an impactful tool in helping set goals, maintain investment discipline, and reduce decision fatigue,” says Smith. “Advisors need to ensure that investment decisions are being optimized for the financial betterment of the investor. Understanding their underlying biases and mitigating suboptimal investment decisions is critical for advisors in a digitally pervasive environment,” he concludes.

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