client bias
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This article appears in the March 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

When meeting new clients, financial advisors need to take an objective position in order to fully understand risk tolerance, goals and more. But bias, and especially implicit bias, can sometimes get in the way of fully knowing your client.

We all have biases, and being aware of those biases can help ensure you are giving appropriate advice to all of your clients.

Implicit bias, sometimes called “unconscious bias,” comes from associations we have that automatically come to mind about people based on their social group membership, said Kate White, a professor of marketing and behavioural science and senior associate dean of equity, diversity and inclusion at the University of British Columbia’s Sauder School of Business.

These associations can be based on identity markers, such as gender, age, race and socioeconomic background. They influence the way advisors approach their work with clients.

For example, many advisors were taught to base risk assessment on a client’s age, said Shari Hensrud, vice-president of risk and analytics with Riskalyze, a financial technology company in Auburn, Calif. Younger clients would take on more risk and older clients would take on less.

However, advisors need to separate capacity for risk from willingness to accept risk. So, while a 25-year-old might have more capacity for risk because of a longer time horizon, that doesn’t necessarily mean they’re ready and willing to take on great risk.

“Typically, biases don’t consider the emotional side,” Hensrud said. “And it’s the emotions that drive the mistakes people make as investors.”

Additionally, there is a common misconception that women are more risk-averse than men.

“If you Google ‘women investing loss aversion’ you’ll find that many of the headlines point to the fact that women aren’t willing to take on as much investment risk,” said Alice Ambrosie, vice-president of practice management with CI Global Asset Management in Toronto. “In our experience, women who have a clear understanding of their investment goals are, in fact, willing to take on risk when it is necessary.”

The biggest impact that bias can have is that clients can receive the wrong advice or advice that is not tailored to their needs. Further, it can create a lack of trust toward the investment industry as a whole, Ambrosie said.

“Everyone has to be self-aware enough to understand that we all have some form of natural bias,” she said.

The challenge is to understand what those biases are and how they come into play in our client relationships.

Here are some strategies to help you minimize bias when dealing with clients:

Recognize your biases

The first step toward minimizing biases is recognizing where they exist, according to Ambrosie. “We can’t change unless we understand where to start,” she said.

When Ambrosie works with advisors, she often finds their first inclination is to say that they have just as many great relationships with female clients as they do with male clients.

“And that may be true for the top 10% of their book of business, but when you really unpack it, we often find that the numbers are significantly skewed toward [men] as the primary relationships,” she said.

Ambrosie recommends you go through your book of business and identify who your primary relationships are with when you serve couples. When examining your interactions with straight couples, you may discover that your relationships with women are weaker than you thought.

One way to combat this imbalance is to meet with each partner separately, which might change the dynamic.

“They may have different goals and concerns than their spouses have,” Ambrosie said. “And without someone taking the time to drill down into that, it presents a risk that advisors are operating on unfounded assumptions.”

You can also benefit from surveying clients about whether they’re happy with the level of attention and care that they’re receiving, including demographic questions regarding age or gender.

“If you find that certain cohorts of clients have different answers from others, that presents [evidence of] a bias,” Ambrosie said.

Ask open-ended questions

When advisors become more experienced, they tend to have less structure with their discovery meeting questions, Ambrosie said. It’s important to continually evaluate your process even when you’re further along in your career.

Open-ended questions can reveal details about long-term planning and risk tolerance. Ambrosie suggests asking questions such as, “What are your career goals for the next 10 years,” and “Do you have health concerns for yourself and your family that we should be aware of?” These questions can help begin conversations.

Jackie Porter, a certified financial planner with Carte Wealth Management Inc. in Mississauga, Ont., said she has met women who feel they have been talked down to by other advisors.

In those instances, when advisors say, “Did you get that?” clients just say “yes” because they don’t want to feel embarrassed or judged for wanting further explanation.

“If you’re talking down to someone, you’re definitely not asking for comprehension, you’re not asking them if they need more clarification, and you’re putting yourself at risk from a know-your-client perspective,” Porter said.

Advisors should always encourage questions, check for comprehension in discovery meetings, and ask questions that require more than a “yes” or “no” answer, Porter added.

Slow down

Biases are more likely to affect us when our brains are operating in what psychologists call “System 1” or automatic and quick thinking, White said. She describes System 1 as a way of taking mental shortcuts to make quick decisions.

When we’re in System 2 thinking, we’re paying more attention and thinking carefully and rationally. Biased thinking is less likely to occur in this situation.

“We can’t be thinking carefully all the time,” White said. “We often do things on autopilot and go quickly. Maybe we’re pressed for time or maybe we’re a little bit distracted. All of these things can make us go into System 1 thinking.”

Learning to be aware of those two different types of thinking and when bias may occur is a good start. If you notice that you’re moving into System 1 thinking, take a moment to reflect on whether the matter needs more consideration, White said.

Break down the bias

If you suspect you’re treating clients differently based on their identity, White said, consider practising “counter-stereotypical imaging.”

If you notice, for example, that you’ve been serving women with the bias that their main priority is saving for their children, a way to break that bias is to bring to mind an example that challenges the stereotype. You might think of another client who gives other goals a much higher priority than saving for their children. The objective is to bring to mind an example that counters your implicit bias, White said.