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By Bernard Letendre
Special to the Financial Independence Hub
Emotions play a very big part in how we live our lives and have an impact on the decisions we make every day: including how and when we each choose to invest for our future.
As financial markets move up and down, investors’ emotions follow suit. Emotions and behavioural biases play a role in people’s investment decisions, and often, emotionally-driven investing can leave them with poor returns in the long run. Add a volatile market to the mix and it can make it even harder to reach important investment goals.
Financial advisors know that staying invested during market downturns makes sense. While this recommendation is typically passed on to clients, panic sets in and some clients insist on selling to avoid a loss, despite sound logic and statistics. We all need to be taking a closer look at people’s behaviours and biases and finding ways to counteract them, for the benefit of our investors.
A new Behavioural Economics program for Canadian advisors
With that in mind, Manulife Investment Management wants to help change the investment game for our clients. Through a new partnership with BEworks, a behavioural consulting firm and research institute,we launched a Canadian Behavioural Economics (BE) program to help advisors understand and manage human emotions in volatile markets. The program will be rolled out to advisors over the course of this year with more to come in 2020.
With the help of Dr. David R. Lewis at BEworks, our advisors have access to:
• Scientific-led research and actionable tools to help them and their clients understand the biases in investment decision making
• Strategies to overcome these biases
• Our evolving Advisor Volatility Toolkit to help them:
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- Understand what drives investor behavior
- Understand markets and build better portfolios
- Learn about our actively managed solutions that offer both downside protection and upside participation
At the Toronto première of our short documentary, The Upside of Down, Dr. Lewis shared a number of tools that advisors can use to help their clients:
• Pre-commitment: Have clients agree to remain invested in the market unless it drops by a pre-determined amount (i.e. 20% to 25%). People like to be self-consistent. Establishing a threshold allows a client to say, “I made a decision and I’m a smart person and I’m going to be consistent with that good decision.”
• Mental accounting: Separating money into separate buckets can be a useful illusion. If advisors can get clients to think about a portion of their money as a long-term investment that they can forget about for 20 years, you can actually desensitize them to the volatility.
• Emotion priming: People tend to feel emotions more strongly when they feel they don’t have control over them. Discussing market fears with clients allows them to confront their anxiety, which gives advisors the opportunity to say they’re feeling the same way, while offering reassurance that clients are doing the right thing.
• Mental time travel: When a client wants to liquidate assets in a panic, ask how they would feel in a month if, as typically happens, the market rebounds and they miss out on a 20% gain. This time travel exercise can be pushed farther to help clients imagine how present decisions will affect their quality of life in retirement.
Financial advisors play a critical role in helping their clients achieve their goals. The 2016 CIRANO study entitled ‘The Gamma Factor and the Value of Financial Advice’ found that investors who worked with an advisor were found to accumulate 290% or 3.9 times more assets after 15 years than comparable non-advised investors. At Manulife, we’re committed to making Canadians’ decisions easier and their lives better. We believe that by equipping advisors with these important tools and information they can better support their clients.
Applying the principles of behavioural economics not only reinforces the value of financial advice but also protects the livelihoods of Canadians and their investment goals. We don’t have to wait for a downturn to react as we have in the past. In this case, the best defense is a strong offense.
Bernard Letendre is Head of Wealth and Asset Management, Canada, at Manulife Investment Management. He is an active blogger on social and corporate responsibility: follow him on LinkedIn. Bernard brings 23 years of experience in the financial services industry to his role. Before joining Manulife Investments, Bernard was Managing Director of Manulife Private Wealth and held leadership positions at BMO Private Banking, Standard Life and Investors Group. He holds a Bachelor and a Master’s degree in law from the University of Montreal, is a member of the Quebec Bar and is a published legal author.
