Clients have their own preconceived views or in other words bias, which influences their actions. Such prejudices can make them take decisions that are illogical. Given below are 3 common client biases and how financial advisors can deal with them effectively:
1. Herd mentality
Simply put, people will follow what others are doing. Even though clients are not sure about a particular investment, they will choose it because of the herd. Such mob power has led to many financial disasters. Although herd mentality is difficult to tackle, the best way financial experts can manage it is by explaining to their clients that every individual has different goals whether it is short-term or long-term and irrationally following what others are doing can have a bad impact on their portfolio.
2. Loss aversion
For any individual, losing Rs 100 is more upsetting mentally then the delight of earning Rs 200 on the same stock. This want to prevent losses keeps clients away from putting funds in equities and thereby they miss out on wealth building opportunities. In this case, the ideal approach for financial advisors is to implement an asset allocation method which achieves the perfect balance between returns and risks.
In this way, you will develop a portfolio with loss degrees which are fairly acceptable to the client. For example, if Rs 1000 is invested, Rs 200 will be divided in 5 distinct asset categories so that even if one or two produce losses, the positive results in the other few will ensure your clients don’t get worried.
3. Too many choices
Investors are aware of the numerous mutual funds offered by several fund houses. Financial experts are often asked by their clients who are confused with so many choices about the best scheme they should invest in. As an advisor, you must first determine their objectives, and then filter schemes according to investment goal and tenure, thereby limiting the number of funds and making the selection task simpler.