Table of Contents
Role of Emotions in goal setting-
|Role of Emotions in Goal Setting
|People react differently to the stress and strain of modern life. Adviser’s role lies in understanding these impulses and providing ways to make sure that such behaviours are self-limiting.
|Make the client conscious that the behaviour is induced by stress. Have a specific budget for indulging in such behaviour.
|A person goes on a shopping or buying binge in order to reduce stress.
|Make the client conscious that the behaviour is induced by stress. Have a specific budget for indulging in such behaviour. In extreme cases, a separate account can be opened by the client where the budgeted amount is kept and money is spent only from there.
|Too many and too frequent transactions
|The need to do something whereas investing requires long term consistency and patience. The action bias combined with other biases induces clients to have too frequent and too many transactions which has the impact of turning an investment activity into a trading activity.
|Prime the client in advance with the benefits of patience and long term investing.
|Chasing Past Performance
|Investors invest in last year’s winners. Investing based on past performance is like driving a car by looking in the rear view mirror.
|A pre-decided asset allocation policy that has upper limits for each asset class makes sure that overexposure to a specific asset class is avoided.
|Home Country Bias
|Most Investors prefer to invest in the securities available in their home countries due to familiarity with the markets and the companies involved as well as the regulatory environment.
|Get educated on the benefits and opportunities in global investing and, in turn, educate their clients about the same.
|Buying Insurance for Tax Saving
|At least 3 generations of Indians have grown up on a diet of buying insurance for tax saving alone. Appropriate and adequate insurance is the first step of any good financial plan.
|Highlight the need for adequate pure insurance products and the poor returns from investment cum insurance products as compared to equivalent investments combined with pure insurance products.
Nudging Investors for Better Behavior
- Nudging refers to subtly influencing behavior through positive reinforcement and guidance
- Investment advisers can use nudges to encourage clients to make better financial decisions
- Lay down advance ground rules that the client buys into
- Use ground rules as built-in nudges for client behavior
- Example: set rules for asset re-balancing to encourage profit booking and buying low-priced assets
Role of Investment Adviser in Management of Client Emotions:
Investment advisers have a critical role in managing client emotions and helping them make rational decisions. This involves:
- Understanding client behavior: Advisers need to have a good understanding of how clients react to market cycles and changes in their financial situation.
- Setting realistic expectations: Advisers must ensure that clients have realistic expectations about their investments and the returns they can expect to earn.
- Providing a calming influence: During times of market volatility, advisers need to provide clients with a calming influence and help them avoid making rash decisions.
- Prioritizing goals: Advisers should help clients prioritize their financial goals and make decisions based on what is most important to them.
- Providing objective advice: Advisers must provide objective advice to clients, even if it means suggesting alternatives that may be emotionally difficult to accept.
To better understand the client’s priorities and emotions, an investment adviser should conduct regular reviews of their financial situation and goals. This will help the adviser to provide customized advice that is tailored to the client’s needs.