Feature In Advisor Perspectives: The Insurmountable Barrier Facing Automated Advice

Matt Reiner Benjamin Technology Atlanta

Feature In Advisor Perspectives: The Insurmountable Barrier Facing Automated Advice

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Duke basketball fans have a widespread – and sometimes deserved – reputation for being arrogant, smug and generally annoying.

But I have to give the “Dukies” credit for helping to prove that computers and algorithms will never replace human financial advisors.

Behavioral psychologist Dan Ariely made a fascinating discovery in his study of Duke students and their attitudes towards basketball tickets, which are distributed via lottery. The students who didn’t receive tickets told Ariely they would be willing to pay up to $170 for tickets. The students who got tickets said they wouldn’t accept less than $2,400 for their seats.

That crazy divide between what people without tickets were willing to pay for tickets (a smaller amount) and what people with tickets were willing to sell their tickets for (a much greater amount) illustrates three aspects of human nature that impact investment decisions.

We fall in love with what we already have. We focus our attention on potential losses rather than possible gains. And finally, we assume that other people will see the transaction from the same perspective.

As financial advisors, we see this behavior every day, as we watch our clients ride an emotional roller coaster. Clients want to hold onto their gainers, which makes it hard to take profits. Meanwhile, they want to get rid of the losers in their portfolio because, “they aren’t ever going to come back.” Of course, that thinking goes against the way investing should be – buy low, sell high.

As the Duke kids proved so convincingly, humans are irrational. That simple truth ensures that human financial advisors are never going away. Families need someone to hold their hand through the ups and downs and prevent them from making bad emotion-based decisions.

Among the emotions that distort client decisions are fear, guilt, shame and envy. Many of those feelings have no basis in fact or reality. For example, a client might worry that if they don’t dump a falling stock today, they will lose everything and won’t be able to retire.

Irrational guilt for having “too much” money can drive overspending on friends or a charitable strategy not aligned with a thoughtful financial plan. A lack of financial knowledge or excessive debt can erode self-respect and lead people to neglect or reject financial advice. Envy prompts people to try to keep up with the Joneses, which often leads to poor spending and investing decisions.

A skilled financial advisor can help clients work through these emotions to blunt their negative influence. The objective of the advisor’s work is to maintain an on-track portfolio and a soothed client.

That goal requires the advisor to negotiate with the client’s emotions to find a position that serves both her financial objectives and emotional needs.

A few years ago, I met with a prospect who had 25% of their money invested in one company she loved. While the stock had done well, that position needed to come down to about 10%. Unfortunately, the prospect was emotionally invested in this position. Even more unfortunate, I didn’t know much about this prospect or her motivations.

But fortunately, she became a client and I was able to work to overcome this.

I had to acknowledge and explore the emotional piece of the situation and develop a workaround. Over time I built a relationship and connection with this client. Eventually, based on what I came to know, I was able to present her with four other stocks that might resonate with her. Because I had learned that she was extremely cautious, I suggested that she make a very small trade-out to move some of her money into a couple of my recommended companies. Over the next four years, I occasionally made the same, “let’s just, you know, make a small swap,” pitch until we finally got her portfolio back into balance.

Was it a lot of effort? You bet. Was that effort worth it for both of us? Absolutely.

A financial advisor can’t provide such nuanced guidance without understanding the client and their emotional make-up. And only a human advisor can know another human being. No algorithm will ever ask (or understand) how a client feels.

As long as financial advisors understand that we are in the business of tending to our clients’ feelings as well as their money, the future is secure for our profession.


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