IAP roundtable to discuss risk profiling and retail advice

Financial advisors, like clients, might have personal biases regarding investing. These biases could be driven by emotions, past experiences, fees or generational orientation. Some advisors, on the other hand, will go along too easily with their clients’ preferences in order to avoid conflict and to retain the client. These tendencies could work against clients’ interests.

It is important to avoid personal biases when giving advice to your clients, says Heather Holjevac, senior wealth advisor with TriDelta Financial in Oakville, Ont. “You have to forget what’s important to you,” she says, “and think about what matters to the client.

“You must have an open mind,” she adds, “and make investment recommendations based on your clients’ goals and objectives.”

In practice, however, advisors often lose their objectivity. For example, a large body of research indicates that many advisors are inclined to recommend investments based on the commissions or fees those investments generate. And the bias toward products that generate the highest commissions might not be in line with clients’ interests.

Advisors also might be influenced by hot trends or short-term market surges without considering the long-term implications of their investment recommendations. Clients might reinforce such biases by telling the advisor they want to join a hot trend they have read about.

> Contrary to your advice
Clients may want to invest in securities contrary to your advice. For example, Holjevac says, a client might tell you, “I don’t care what the market does, I want to invest in safe investments, like guaranteed investment certificates.”

Or, they might be influenced by other professionals, such as their accountants, as to what products they should invest in.

In such cases, Holjevac says, the advisor’s job is to explain the options clients have and the implications of each option, without imposing his or her personal biases. And then let the client make the decision to invest.

“It is hard not to be opinionated,” she says. “But what matters is that clients understand the implications of their choices.”

> Advisors’ biases
Conversely, some clients rely solely on their advisors for investment recommendations, leaving the door open for the client’s portfolio to reflect the advisor’s biases, Holjevac says. For example, an advisor might not like U.S. or bank stocks, and will not recommend them even though they might be suitable for their clients.

Some advisors might come from a generation that does not believe in having any debt, Holjevac says. So, the advisor’s first recommendation might be to pay off the mortgage before saving for retirement, which might not be in the best interests of the client.

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