It is not the markets that make mistakes, but investors. Advisers must take on their biases and change their approach accordingly
As humans, it is in our nature to misbehave when it comes to money and investing. That is just what we do. The average person carries round a suitcase full of biases ready to be whipped out at any opportunity, often when they are about to make an important financial decision.
The problem is, biases stop us making the right decision for our financial wellbeing or the optimal choice for our future happiness.
Biases tell us to invest in cryptocurrencies because that is what everyone else is doing (bandwagon bias). They convince us we can make better financial decisions in our lives than impartial financial professionals (overconfidence bias). And they keep unpleasant memories front and centre when we make a financial decision (negativity bias). The list of biases goes on, but you get my point.
As responsible advisers, we have a choice here. Do we shrug and say we can’t fight human instinct?
Do we brush it off as a lot of fuss about nothing and just keep doing what we have always done?
Do we pretend these biases do not even exist at all? Or do we accept them, take them on board and amend our approach accordingly?
Here is a clue: it is the last one. It is impossible to stop humans being human so we, the advisers, are the ones who have to adapt.
It is our job to steer clients away from irrational decision-making and coach them out of these patterns of financial misbehaviour, for the benefit of the client and the good of our noble profession.
The business of human nature
I learnt all this a few years ago. I say learnt, it was more of an epiphany. When I started out as an adviser, I saw myself doing what everyone else did: managing money. But one day, after another meeting of discussing a client’s problems, it dawned on me. All the issues I dealt with day-in, day-out were caused by the people, not the money. I realised that managing the humans was more fundamental to success than managing their assets.
To put this into a clearer context, I would say the individual has the capacity to be a bigger wealth destroyer than inflation.
As a behavioural financial adviser, I am not in the money business but the business of human nature.
Humans are not rational and we do not inherit wisdom from previous generations. We all come from a standing start and need to learn, adapt and evolve on our journey through life. This is an opportunity for advisers because it allows us to reset how investors think and operate. We can show when they are making mistakes and nudge them towards the right decisions.
This is something I am hugely passionate about, and I am not alone. There is a community of like-minded advisers out there, all equally enthusiastic about the behavioural message. Indeed, I launched the Humans Under Management conferences to bring us all together to share ideas on how to channel its massive potential.
It is not the markets that make mistakes
Last year was a negative one for investors in most markets, but this was the first time it had happened in almost a decade. A downturn can be a common time for investor mistakes. Some may never have been through a market decline before. It is important to remember that the market itself does not make mistakes. It does what it has always done, which is to move in cycles.
In the global equity markets, approximately 25 per cent of the years will be negative, while 75 per cent will be positive.
Investors also move in cycles. To put it bluntly, the two primary human emotions they move between are fear and greed. They are fearful when the market is declining, and greedy when it is on the way up.
Feeling the fear is perfectly natural but acting on the fear is irrational and not in anyone’s long-term financial interests.
We sometimes need to remind clients to sit tight because, once the decline is over, the markets will continue to rise.
In my next column, I will be expanding on the benefits of the behavioural approach.
But if I could say one thing to sum up its importance in the meantime, it would be this: the market itself is unemotional but people are not.
Accepting this and making it a part of our adviser approach is vital and, for me, the only real route to providing successful advice.
Andy Hart is founder of Humans Under Management