Behavioral Finance Advice for Financial Planners
Daniel Crosby is a PhD psychologist, a Value Investor and Behavioral Finance expert. He is one of the most famous asset manager with more than 30 years’ experience. This article presents key insights into his behavioral commandments to finance professionals.
Psychological Aspects and the Secrets of Investing.
Daniel details some secret psychological aspects of investing. He points out that being an advisor one should know how to add value to the clients life who has to invest. It is non rhetoric that the client is the one who is paying the advisor and financing the complete job as well, advisor should put in all-out effort to help them.
The Solution is Easy most of the times.
In 1400 Vasco De Gamma was exploring his business all around the globe. While carrying out this task, his men got crippled because of some disease. After a lot of exploration they used some fresh products. A small disease created a huge problem. Charles Briken discovered Vitamin C late which became successful in curing the scurvy disease. Scurvy remained a big problem for many countries worldwide and affecting the fighting strength of any country. Vitamin C cured their disease. Since both the problems were not considered difficult, whereas the solutions were quite simple.
Financial Experts should address problems with equal consideration and seriousness. Another example of it is that, there was man who was suffering from leprosy. He searched hard to get rid of it and found a holy man who advised him to take bath in Jordon River 7 times a day. The river full of salts and other materials itself was more dirty. The ill man took bath and recovered. Being an advisor to clients, it is their prime responsibility to manage the client’s behavior well. According to Einstein it is not necessary that every complex problem has a complex solution. He further claimed that all problems can be solved by using ten simple practices.
Adding Value to Investors/ Clients work.
The advisor must always add value to the solution to improve its implications for the client. There are three primary main studies under taken to carry out an analysis of utilizing of financial advisors by the clients. Aon Hewit is one of them who believes that the investors who have used advisors were 2% better than those who didn’t used them. They observed that 1.86% of native fees was worse than the clients who worked with professionals.
Vanguard stated that the use of advisor adds 300 base pints per year. The study also presented a breakdown of the benefits in every field because of the involvement of client. They found that while working with a financial expert the tax management, hand holding of various activities and assess management was handled with perfection. The study points out that share of experts increases the hand holding to 50 base points and asset management of 25 base points. But, the Morningstar study pointed out that use of financial advisor increase the cost effect by 2% to 3% which makes an increase of $10,000 every year. He emphasize that the focus should be on clients’ behavior.
Nactics Study on Using an Expert.
Nactics carried out study of goal based studies and found that in goal based investments it is vital to educate client about the biggest value adding techniques to work. Hence, the financial management and planning ensures the greatest value addition to the client’s investments. According to one of the research, only 6% of the clients and investors were interested in hiring an advisor just as financial expert in order to optimize his profits. However, 83% of the people believed that the advisors were not required to carry out behavioral management, hand holding and adding on more value.
Clients Education about Risk is preponderant.
Clients usually aim for safety without any risk. The client wants to work with full confidence, satisfaction and sleep with comfort. So, he is not ready to take risks. One study finds that the investment management is a two way traffic. The advisors must try to convince clients about risk. And should set client expectations according to standard investment rules..
Ten commandment for the Advisor to the Client.
The first commandment is the power to make decisions. The advisor must guide the investor well of all the prose and corns of all possible situations. The next commandment is that the risk has no number and should not be regarded as a measurable quantity, every investment involves many different types of risks. Client must not be fearful of risks because every action of man is risky by nature. The volatility and risks are one of the harshest realities of making financial investments. Risk management is not the job of advisor and it must be clear to the client. The next advice is to begin everyday as a new day. It can be regarded like the concept of compound interest. Time passes very quickly and the preferences changes daily. So being an advisor, one should always begin his day with energy, enthusiasm and new missions.
Trouble may be an Opportunity.
According to John Templeton, a trouble must be taken as an opportunity. The next is that the time of maximum pessimism is the best time to buy and the time of maximum optimism is the time to sell. One should always try to buy low and sell high. However, market greed fear must be taken care and given due consideration. The clients behavior can be related to a soccer keeper who stands in front of penalty shoots is in a trouble. According to the research, the best time he has to stop penalties is when he is just standing rather than diving left or right. Same is the case of investor. When he goes with the same strategy he gets the most profit rather than dying left or right.
Don’t Underestimate the power of doing Nothing.
Another sound advice is to do less one can do as the famous saying states that one should never underestimates the power of doing nothing. Forecasting is unreliable and is done by weather men. JP Morgan, who was considered one of the biggest forecaster was asked several time by the press about the economic deviations. At last, he called upon a press conference where all the media was present. On being asked about market forecast, he said “It will fluctuate” and then left the conference.Never make a big decision in life in following situations, when you are Hungry ,Angry,Lonely or Tired On must HALT.
Always have a Personal Benchmark.
The last advice is that to have benchmark. According to one of the research, on being questioned, 76% of the advisors said their clients have some plan whenever they work. 60% of the investors said they have no goals and 70% said that they have no plans. However, 80% said that they take their final decision on their guts.Lastly, The famous Sir Isaac newton said “I can calculate movement of stars but not madness of men”