In today’s world of constant information, investors are bombarded with news about recent developments in the capital markets. From the screens in the elevators they ride to their ubiquitous mobile devices, investors have access to an unending stream of market updates.
In addition, many dealers are offering clients access to information about their investments through a client portal or even an app on their mobile device. For many clients, checking on their investments is now a simple click or thumb tap away. While this is great for investors on many levels, it does pose some hazards to advisors when their clients become too focused on short-term market movements.
As little as a few years ago, it was easier for advisors to keep clients focused on the longer term. Clients received account statements by mail periodically, either monthly or quarterly. Now, financial services technology increasingly provides investors with clear and virtually immediate line of sight to their investments. This more frequent access to the value and performance of their investment portfolios, along with increased transparency around their account information, has served to educate and engage investors. But it has put advisors at somewhat of a disadvantage with some of their clients. It can now be extra work for you to keep your clients focused on a longer-term view and ensure they aren’t simply reacting to market volatility.
There’s a fine line between client engagement and overreaction. Is the abundance of technology and easy access to information encouraging clients to get too wrapped up in the day-to-day performance of their investments? Might they wish to sell an investment that has experienced a downturn instead of staying the course?
Behavioural biases definitely come into play here. We know from the principles of behavioural economics that some people are more susceptible to the influences of herd mentality and the fear of missing out (FOMO). They will follow others for investment trends and put themselves at risk of making decisions they may later regret. In addition, the present bias is prominent among investors. It causes people to focus more on short-term gains or losses than on longer-term ones. Any client experiencing one or more of these behavioural biases is likely to feel anxiety as they watch their investments fluctuate or decline in value.
If you find you’re getting frequent calls from clients who are worrying about missing out on the latest investment trend or who are reacting to short-term market movements, you may want to view these calls as a coaching opportunity. Coach these clients through their biases by reminding them to take a longer-term perspective and not succumb to short-term thinking.
Tips for advisors:
- Talk to your clients, especially during market volatility or declines. Although it may seem easier to avoid these conversations, doing so creates bigger problems. Clients value communication from their advisors during times of market volatility or declines – it shows that you’re on the job and thinking about what they are experiencing. Remember that one of your most important roles as an advisor is to be a financial coach for your clients.
- Tune out the media noise. Encourage clients to stay informed without overreacting to every market blip or short-term movement. Help clients temper their desire to stay up-to-date on the markets by building their comfort and confidence in the ability of their investment portfolios to meet their goals.
- Anticipate behavioural biases. Try to identify which of your clients are more susceptible to behavioural biases, and then proactively reach out to them and help them manage their tendencies. Consider helping them structure portfolios that they won’t feel the need to check and second-guess so frequently.
- Take a long-term view. Encourage your clients to look at the long term. Remind them of the plan you helped them develop, and give them some context for short-term market movements. Specifically, don’t focus too much on short-term returns. Where the information is available, talk to clients about returns over multiple years.