Managing investor behaviour is an advisor's best bet to help clients maximize returns and grow their own business

By Jade Hemeon | November 2017

Financial advisors can benefit greatly by learning and applying techniques to help clients manage their emotions and actions. Investor behaviour is gaining increased recognition as one of the most important determinants of investment success.

That was the underlying message delivered during a series of forums sponsored by Toronto-based Morningstar Canada in Toronto, Montreal and Vancouver this autumn. The forums featured a panel of investment industry experts who shared recommendations on how you and product providers can help your clients act in their own best interests.

"[There's] an important role for the advisor to play as a behavioural coach," said Steve Wendel, head of behavioural science with Chicago-based Morningstar Inc. during a panel discussion held in Toronto.

To reinforce the information presented at these forums, Morningstar published a booklet entitled Simple But Not Easy, which recommends strategies you can use to help your clients avoid destructive behaviours such as buying high, selling impulsively after a severe crash or sitting paralyzed on the sidelines after a crash is over, thus missing out on subsequent market recoveries.

Managing behaviour is your best bet in helping your clients maximize returns and ultimately growing your business, according to the forum's leaders.

"You can have well-designed [mutual] funds and good [portfolio] managers and charge reasonable fees," said panellist Tom Bradley, president and co-founder of Steadyhand Investment Funds Inc. of Vancouver. "But, ultimately, what's most important is investor behaviour."

Although clients are subject to hundreds of conscious and unconscious biases and have strong tendencies to follow the herd and flee from frightening events, you can use small interventions and communication strategies to modify client behaviour, Wendel says.

For example, constant updates or too much information have been found to be detrimental to investors' results. Frequent monitoring of portfolios can be unsettling to clients and lead to a tendency to tinker and trade. Providing quick and easy summaries of pertinent client information, with additional details available in appendices and attachments, is better.

As well, you can encourage your clients to take a calm approach by focusing on a well thought-out financial plan and whether the level of a client's assets and investment mix is still on target with his or her goals.

"[The research] is unambiguous," Wendel said. "The more often people look at their portfolios, the worse off they are."

Research done in Israel found that clients were better at sticking to long-term financial plans when they received statements no more frequently than once a year, according to another Morningstar panellist, Jason Stewart, executive advisor of BEworks Inc. of Toronto and main author of a report on behavioural insights published by the Ontario Securities Commission earlier this year.

Furthermore, setting realistic expectations and preparing clients for the emotions they will feel during inevitable and unpredictable market corrections are important, Bradley said: "I always substitute the word 'when' for 'if.' [My wording] is: 'When your portfolio goes down 20%, Mrs. Client, not if.' When the star is high in the sky and there's a halo over your head, that's the time to plant the seeds for when times are not as good."

One of the most destructive client behaviours is the tendency to buy high and sell low. Morningstar research shows the returns that investors have earned consistently underperform the returns actually delivered by the mutual funds in which they invest.

For example, for the five years ended Dec. 31, 2016, Morningstar's research found that unitholders of diversified Canadian equity mutual funds achieved an average annual return of 10.95%, lagging the 11.55% return of the average fund.

If you can keep panicky clients on track during turbulent times, your clients will receive the full value of long-term returns as well as tax efficiencies, thanks to lower turnover.

"The hardest part is getting back into the market once you're out," Bradley said. "There's always something to worry about once you exit a stock or the market."

Morningstar's research found that investors who invest systematically achieved better results. The more that investing can be made automatic and the less decision-making that needs to be done, the lower the risk of faulty market-timing attempts, the panellists pointed out.

For example, your clients can set up plans to make regular contributions to RRSPs or individual mutual funds directly from their bank accounts. Clients also can establish systematic withdrawal plans that will redeem units on a regular basis when they wish to cash out or create an income stream.

Target-date funds - balanced funds that automatically adjust the mix of equities and bonds to a more conservative, fixed-income asset mix as the funds approach a predetermined maturity date - also elicit more committed investor behaviour, Wendel says.

Mentioning the tax consequences of any request for a fast sale of investments also can give clients reason to pause.

"It's about the right display of information at the right moment," Wendel said. "People hate paying taxes more than losing [money] in the market."

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