Helping Clients Change Their Investing Behavior
Garmhausen, Steve, American Banker
Byline: Steve Garmhausen
Most good advisers are used to playing psychologist - helping clients understand and overcome irrational impulses in order to make sound investment choices.
"That's what clients are really paying for," says Todd Feldman, a partner with Behavioral Finance Investment Advisors in San Francisco and an assistant professor of finance at San Francisco State University. "They need help in getting around their irrational behavior."
Now, an Allianz Global Investors white paper authored by University of California, Los Angeles professor Shlomo Benartzi is offering several tools drawn from the field of behavioral finance to help advisers help their clients.
The tools address three familiar challenges: investors' paralysis, lack of discipline and distrust of their advisers. Most decisions that humans make, the paper says, are based on intuition rather than logic. The tools acknowledge the way the mind operates in order to help improve behavior.
Paralysis is a major challenge for investors and advisers alike. The current environment, in which huge amounts of money remain on the sidelines in the wake of the financial crisis, is an apt example of investors' inability to take action when action is needed, Benartzi says.
"A lot of the money on the sidelines, in my opinion, is following the the buy-high-sell-low strategy, which is quite unfortunate," says Benartzi, who is chief behavioral economist at Allianz's Center for Behavioral Finance.
The psychological principle in play when investors are "paralyzed" is known as loss-aversion: For example, investors today are still feeling pain from recent losses, and they are afraid - despite the market's well-established recovery - of incurring more losses.
Benartzi's solution builds on dollar-cost averaging, which can be used to overcome fear of re-entering the market all at once. But in what he refers to as "dollar-cost averaging 2.0," his solution tackles another element of paralysis: procrastination. …