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Investors are warned to keep their emotions in check, being mindful of behavioural biases that can cause them to make bad investment decisions like panic selling or exuberant buying. Examples include recency bias – when decisions are based on recent events, or loss aversion – when investors are more sensitive to losses than gains.
A new report from SEI Canada shows advisors are also susceptible to behavioural biases that could impact their work with clients. The survey, which includes responses from 169 Canadian advisors, shows 34 per cent of survey participants are aware of their own feelings of loss aversion, 22 per cent sometimes feel overconfident in their decisions, and 21 per cent experience recency bias.
The report also shows that 44 per cent of advisory firms don’t have a process to combat investor behaviour proactively in times of market volatility and that only 14 per cent use their customer relationship management or other systems to segment clients by their behavioural tendencies.
Globe Advisor spoke recently with Anne Hoare, head of asset management solutions at SEI Canada, about how advisors can try to combat their own biases to serve their clients better:
Some investors might be surprised to learn advisors are also susceptible to biases. What are your thoughts?
Here’s how I look at it: ‘Are you human?’ If the answer is yes, then you have biases. It’s not bad or good; it’s just a thing. Biases exist. What’s important is to be mindful of them. The advisor is the expert on the technical side of the financial plan, but the investor is also the expert on their own goals and aspirations. When the advisor and investor work together and keep those biases in mind, they can customize and personalize a plan for clients and create opportunities without the wrong emotions getting in the way.
How can advisors keep their own biases in check?
Bias presents itself when we’re not thoughtful about decisions. If we can slow our brains down and think through things, that’s when we engage our rational brain and probably make our most rational and thoughtful decisions. It’s important to validate emotion, but advisors should have a framework to help them slow things down and have a good discussion that leads to the right decision.
What other findings were notable for you?
Our study showed that while 93 per cent of advisors believe clients trust their decisions, outside influences such as family and friends and social media also influence client behaviour heavily. That suggests a greater need for coaching. One solution is for advisors to get out in front of it by using social media as part of their client communication plan. Our research shows that only 12 per cent of advisors surveyed use social media to stay top of mind among their clients. Also, 23 per cent of advisors don’t use social media, so we see that as an opportunity for them to help manage their client’s emotions.
Brenda Bouw, Globe Advisor reporter
This interview has been edited and condensed.
Must-reads from Globe Advisor this week
Why more seniors are opting to stay put than downsize their homes
Advisors are seeing more of their senior clients opting to stay put in their long-time homes instead of downsizing to a smaller house or apartment condo setup. “A lot of our clients are either not planning to downsize, or if they originally planned on it, they don’t end up doing it,” says Chris Ferris, certified financial planner (CFP) at Ryan Lamontagne Inc. in Ottawa. “Many wait until it’s necessary for healthcare reasons.” A recent report from the Canadian Foundation for Financial Planning found that people who have a strong emotional attachment to their house are more likely to want to remain in that house during their retirement years. Only 26 per cent agreed or strongly agreed with the idea of using their house to fund retirement partially. Deanne Gage reports on the trend.
How being a victim of investment fraud motivated this advisor to get wise with her money
In this new series, Behind the Advice, we ask advisors about their relationship with money from a young age, lessons learned over the years, and how their experiences influence the advice they give clients today. Zainab Williams, certified financial planner at Elleverity Wealth Management in Caledon, Ont., talks about how her upbringing in the Democratic Republic of the Congo and Kenya shaped her relationship with money – and the investment scam she suffered that led her to become “obsessed” with personal finance. As told to Brenda Bouw.
How this money manager returned 25 per cent over the past year – and what he’s investing in now
Money manager Jamie Murray believes recession expectations have already been priced into some stocks, making it a good time to buy. “Some companies have seen their share prices fall dramatically, even though their near-term outlook hasn’t changed,” says Mr. Murray, portfolio manager and head of research at Toronto-based The Murray Wealth Group Inc., which manages about $240-million in assets. “We like to hold companies that we think will take market share during recessions,” adds Mr. Murray, who helps oversee the firm’s Global Equity Growth Fund. Brenda Bouw asks what he’s been buying and selling.
Direct indexing could bring enhanced tax opportunities to Canadian investors
Direct indexing may not be accessible in Canada but its tax benefits have some industry watchers examining the possibilities. On a direct indexing platform, if a client wants to own a particular benchmark such as the S&P 500, the client would hold individual securities instead of purchasing units of an exchange-traded fund (ETF) or mutual fund, says Manmeet Bhatia, president and chief executive officer of Fiduciary Trust Canada, a Franklin Templeton Investments subsidiary, in Vancouver. Tax-wise, that means investors would be able to buy and sell individual securities within customized portfolios, crystallizing gains or losses to target specific taxation goals, he adds. Deanne Gage provides more details.
Also see:
Why top-performing advisor teams are hiring more certified financial planners
Six consumer discretionary stocks to consider despite the economic uncertainty
Convertible bond issues rebound with large firms seeking to raise capital
Retail investors pile into zero-day trading options but do they understand the risks?
Global bellwether companies to report earnings in this week’s Advisor Lookahead
What you and your clients need to know
Canada’s banking watchdog cracks down on high-interest cash ETFs that retail investors love
The federal watchdog for financial institutions is cracking down on cash exchange-traded funds, one of Canada’s most popular retail investments, by imposing capital rules that will ultimately lower the monthly yields the funds can pay out. Cash ETFs, also known as HISA ETFs, are hybrid funds sold by independent investment companies that function like high-interest savings accounts but are publicly traded and offer much better interest rates – around 5.3 per cent annually. These rates are similar to the yields offered by guaranteed investment certificates (GICs), which are sold by the banks, yet investors in cash ETFs can withdraw their money whenever they choose. For GICs, the money must be invested for fixed terms. Clare O’Hara and Tim Kiladze report.
CRA announces last-minute extension of underused housing tax deadline to April 30
The Canada Revenue Agency has pushed back the deadline for compliance with a new federal tax on underused housing, in a last-minute decision it announced on Tuesday, the same day it had previously set as the cutoff. Taxpayers will now have until April 30 to file tax forms and pay any amounts owing for the 2022 calendar year under the underused housing tax, or UHT, which imposes a levy on foreign owners of real estate deemed to be vacant or underutilized. Erica Alini has more.
The ‘Bank of Mom and Dad’ is no longer just for down payments
Parents have moved beyond helping their children with a down payment, with high home prices and interest rates forcing them to co-sign on mortgages themselves. For first-time homebuyers, adding their parents’ income to a mortgage application can make the difference between being able to purchase a home or not. But mom and dad should keep in mind the potentially complicated tax and financial considerations related to putting their names on the title, experts say. Irene Galea and Erica Alini provide more details.
How the baby boomer exodus will imbalance the Canadian workplace
The last of the baby boomer generation will be turning 65 in 2030, marking a pivotal moment in a demographic squeeze that has loomed over Canadian workplaces for years. By then, most of this generation will be retired – and the labour market will face a new reality. Andrew Seale reports.
– Globe Advisor Staff