B is for Behaviour Coaching

Continuing with the series of articles based on the “Value of an adviser formula” published by Russell Investments, this post looks at the B in the formula: behavioural patterns that investors tend to follow. If you would like to have a look at the previous article talking about the A factor of the formula, please click on the A below.

A+B+C+P

We believe in the value of advisers and the benefits that professional advice could bring to you, increasing the chances of avoiding the pitfalls that investors working on their own frequently fall into. A clear example early this year has been the GameStop saga. A surge of small investors using the Robinhood trading app triggered a massive short squeeze that drove GameStop stock 400% higher at one point before it began to fall.¹ Many of those investors – who shared information through an online stock-trading forum – first gained, then lost millions.

The market sell-off in March 2020 is another example of how important the role of an adviser is when emotions overtake reasoning. Without an adviser’s guidance, many investors could have sold following the impact of coronavirus on the markets. In fact, investors redeemed a total of £2.2bn from UK equity strategies between May 2020 and January 2021 according to Calastone. As the flow chart below shows, missing out on even a few days of good performance can have a detrimental effect on a portfolio. Helping clients avoid pulling out of markets at the wrong time and sticking to their long-term plan is one way that advisers provide substantial value.

Source: Calastone Fund Flow Index.

Russell Investments’ value of an adviser study² shows that taking on the role of a behavioural coach may be the most important role a financial adviser can play. It is here where finance and psychology meet. Behavioural economics is the academic body of work that recognises the difference between what human investors should do and what they actually do.

One of the key beliefs of behavioural economics is that changing bad investor behaviour begins with awareness. Personal awareness of the investment biases that may be causing their mistakes. Here are the five we consider to be the most common.

1. Loss aversion – Humans tend to prefer avoiding losses more than acquiring equivalent gains.
2. Over-confidence – Investors tend to over-estimate or exaggerate their ability and expertise.
3. Herding – Humans tend to mimic the actions of the larger group.
4. Familiarity – We see this in the way investors tend to overweight their portfolios toward their home countries, even when there might be a recommendation to diversify globally.
5. Mental accounting – Investors tend to attach different values to money based on its source or location or based on a gut feeling.

If you feel like you would like to know more about this subject, the Temple Row team is here to help. Please get in touch with us.

*** Nothing in this article constitutes advice and all investments carry some level of risk. ***

¹ Source: Bloomberg.

² Source: russellinvestments.com/uk/insights/value-of-an-adviser