In a year characterized by ongoing uncertainty from the COVID-19 pandemic and heightened retail investor interest in the markets, financial advisors reported a surge in behavioral biases among clients, according to the BeFi Barometer 2021. This is the third year of the survey commissioned by Schwab Asset Management in collaboration with the Investments & Wealth Institute and Cerulli Associates.

Advisors witnessed significant upticks in many common behavioral biases among clients:

Behavioral biases affecting client investment decisions

2020

2021

Recency bias: Easily influenced by recent news events or experiences

35%

58%

Confirmation bias: Seeking information that reinforces existing perceptions

24%

50%

Framing: Make decisions based on the way the information is presented

26%

44%

Familiarity / home bias: Preference to invest in familiar (U.S. domiciled) companies

27%

43%

Loss aversion: Playing it safe or accepting less risk than they should tolerate

30%

43%

Behavioral biases and client interest in new types of investments were potentially driven by outsized media attention on buzzy investing trends, as well as social media and influencers. Just over half of advisors said clients sometimes or frequently raised questions about stocks they saw on social media (52%). Sixty percent said clients have invested in cryptocurrency in the last year, while one-third invested in special purpose acquisition companies (SPACs) and a quarter invested in so-called ‘meme stocks.’ When faced with inquiries from clients about social media-driven investment ideas, most advisors advised clients that these investments were unsuitable for their portfolios and did not invest in them (73%).

“There has never been a more critical time for advisors to incorporate behavioral finance techniques into their practices to understand and help clients stay on course to reach their long-term financial goals,” said Omar Aguilar, PhD, Chief Investment Officer and Head of Investments at Schwab Asset Management, and a practitioner of behavioral finance in asset management for over 20 years. “The combination of pandemic-driven uncertainty, market volatility, and speculative investing trends have culminated in an environment where behavioral biases thrive.”

In addition to reporting higher levels of biases among clients, significantly more advisors pointed to the effectiveness of using several behavioral finance techniques to mitigate behavioral biases. The findings suggest that behavioral finance techniques are resonating with advisors and investors more in the current market environment than in past market cycles.

Most effective behavioral bias mitigation techniques

2020

2021

Taking a long-term view

62%

76%

Integrating goals-based planning

47%

75%

Implementing systematic processes

52%

66%

Cautioning investors to stay calm

35%

52%

Increasing portfolio diversification

37%

48%

“Advisors can always use behavioral finance techniques to their advantage, but in times of market uncertainty, such skills can be a true differentiator,” said Asher Cheses, Associate Director of Wealth Management at Cerulli Associates. “Our findings this year—a year of unprecedented challenges, uncertainty, and volatility—support that those who leverage behavior bias mitigation techniques were able to secure client trust and retain assets.”

The top five benefits of incorporating behavioral finance techniques as reported by advisors in 2021 were:

  • Strengthen trust and relationship with clients / increase client retention
  • Keep clients invested during periods of volatility
  • Reduce short-term or emotional decision-making
  • Better manage client expectations
  • Help improve clients’ financial decisions and prioritize goals

When it comes to how advisors are implementing behavioral concepts, 74% do it through client communications, predominantly to align their communications with clients’ emotional tendencies (68%). Fifty-six percent leverage behavioral concepts within the portfolio construction process to match risk tolerances (78%) as well as age (73%) and wealth (62%) factors.

“There are many ways advisors can leverage behavioral finance techniques to address specific client characteristics and profiles, and the value of taking these steps is clear,” said Devin Ekberg, CIMA®, CPWA®, CFA®, Chief Learning Officer and Managing Director of Professional Development, Investments & Wealth Institute. “Advisors who use behavioral finance are building stronger relationships and retaining more clients. Perhaps most importantly, they are helping their clients stay the course through challenging times, which has huge impacts when it comes to investment performance and meeting long-term goals.”

About the Study

Schwab Asset Management, in collaboration with the Investments & Wealth Institute (IWI), retained Cerulli Associates, a leading independent market research and consulting firm, to learn how advisors view and use behavioral finance when working with clients. This third edition of the survey, the BeFi Barometer 2021, was conducted by Cerulli Associates in Q2 2021 and reflects the views of over 300 advisor members of the IWI. Respondents are diversified among business models, including registered investment advisors (RIAs), wirehouse advisors and national/regional broker dealers. All data is self-reported by survey participants and is not verified or validated. Margin of error is 3%.

About Cerulli Associates

For nearly 30 years, Cerulli has provided global asset and wealth management firms with unmatched, actionable insights. Headquartered in Boston with fully staffed offices in London and Singapore, Cerulli Associates is a global research and consulting firm that provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments.

About Schwab Asset Management

Schwab Asset Management offers a focused lineup of competitively priced ETFs, mutual funds and separately managed account strategies designed to serve the central needs of most investors. As part of the Charles Schwab organization, we champion the needs of investors and seek to enhance the financial lives of our clients in all we do. Operating our business through clients’ eyes and putting them at the center of our decisions, we aim to deliver exceptional experiences to investors and the financial professionals who serve them. Established in 1989, the firm manages more than $635 billion in assets and draws on the knowledge and expertise of more than 119 investment professionals (figures as of 6/30/2021). More information is available at www.schwabassetmanagement.com.

About Charles Schwab

At Charles Schwab we believe in the power of investing to help individuals create a better tomorrow. We have a history of challenging the status quo in our industry, innovating in ways that benefit investors and the advisors and employers who serve them, and championing our clients’ goals with passion and integrity.

More information is available at www.aboutschwab.com. Follow us on Twitter, Facebook, YouTube and LinkedIn.

About Investments & Wealth Institute

Founded in 1985, the Investments & Wealth Institute is the premier professional association, education provider, and standards body for financial advisors. Through its award-winning events, publications, courses, and acclaimed certifications—Certified Investment Management Analyst® (CIMA®), Certified Private Wealth Advisor® (CPWA®), and Retirement Management Advisor® (RMA®)—the Institute delivers Ivy league-quality, highly-practical education to more than 30,000 practitioners annually in over 40 countries. Members of the Institute include the industry's most successful investment consultants, advanced financial planners, and private wealth managers who embrace excellence and ethics in applying a broad set of knowledge and skills in their daily work with clients. More information is available at investmentsandwealth.org.

Disclosures:

Schwab Asset Management is not affiliated with Cerulli Associates or the Investments & Wealth Institute.

Schwab Asset Management is the dba name for Charles Schwab Investment Management, Inc. (CSIM). Schwab Asset Management is a part of the broader Schwab Asset Management Solutions organization (SAMS), a collection of business units of The Charles Schwab Corporation aligned by a common function—asset management-related services—under common leadership. CSIM and Charles Schwab & Co., Inc. (Schwab) Member SIPC are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.

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Karleen Fallon Cerulli Associates 617-841-1005 kfallon@cerulli.com

Christine Hudacko Charles Schwab 415-961-3790 christine.hudacko@schwab.com

Cindy Chaifetz Investments & Wealth Institute 303-850-3079 CChaifetz@i-w.org

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