Understanding a client's motivations goes a long way to helping them achieve long-term goals

Since clients’ past experiences affect how they respond to risk, advisors should take steps to “behaviour-proof” their practices, according to an advisor and expert in the field.

 

Coreen Sol, senior portfolio manager at CIBC Wood Gundy in Vancouver and a former UBC Okanagan adjunct professor, spoke Tuesday at the annual FP Canada Financial Planning Conference about how clients’ personal values and experiences influence their financial decisions.

People’s biases affect how they categorize and interpret information, Sol said. We also have a “desperate need” to control risks and to be right.

She explained common biases advisors may be encountering today.

 

Doing what’s popular: 

It feels natural and comfortable to do what other people are doing, Sol said. For example, people who invested in GameStop while it was popular or hopped on the AI bandwagon by buying Nvidia stock might only have looked at performance without analyzing the companies’ fundamental business models and risk levels.

 

Recent memory influences risk tolerance: 

“The risk you’re willing to take depends on what happened to you last,” Sol said. Many investors shied away from investment opportunities after the 2008 financial crisis even though regulators imposed stricter rules on financial institutions. It’s important to note that people’s risk tolerance changes over time and is impacted by what happened to them recently.

 

Disproportionately focusing on small transactions: 

People tend to round prices up or down in relative multiples, Sol said. For example, people might round home prices to the nearest ten thousand dollars while looking for savings of a few dollars for groceries. Large transactions have more potential for savings, yet people focus disproportionately on small transactions.

 

Segregating money into categories: 

Once money is categorized for a budget, it becomes “sticky” and people forget that money is fungible, Sol said. For example, someone who spent less than planned on their wedding might use the remaining budget for extra spending on their honeymoon instead of paying down credit card debt. Similarly, a young person who inherits government bonds from their parents might keep the conservative assets even though they’re more growth-oriented than their parents.

 

Anchoring to an irrelevant price when a stock falls: 

People often become attached to an investment’s initial purchase price even though it’s no longer relevant. This often means holding on to underperforming stocks. “No one wants to recognize poor decisions because you feel like you made a mistake,” she said. “It doesn’t matter what you pay for an investment. If it no longer suits your objectives, you should sell it.”

How to address bias

After identifying biases, Sol said there are steps advisors can take to “behaviour-proof” their practices. These include creating standardized processes by using automation and checklists, writing investment policy statements to identify personal economic values, and relying on critical analysis. If a practice adopts standardized procedures as a habit, it will make financial advisors double-check their decisions. “And those will save your bacon,” Sol said.