Advisers key to combating bias: Morningstar

Clients who receive coaching from their advisers on the issue of behavioural bias end up achieving more value from their long-term goals, a consultant from Morningstar has said.

Speaking to ifa, Morningstar’s head of business development, Australasia, Heather Dawson said the firm has conducted extensive research into the role of advisers in preventing the negative impacts of client behavioural biases on investment decisions.

“One of the things that we're finding from our research is that if advisers can play a role in being behavioural coaches - they can add a lot of value to their client’s long-term goals,” Ms Dawson said.

Current advice to clients from the investment community is insufficient, Ms Dawson said, and advisers must take a proactive role in behavioural coaching.

Behavioural biases are hardwired into all humans, however, when it comes to investors there are four common biases advisers must deal with, Ms Dawson said.

"The ‘overconfidence bias’ is the tendency of some investors to be overconfident in their abilities to achieve good outcomes while the ‘confirmation bias’ is the act of getting anchored to a certain opinion and cherry-picking facts to back-up a belief," she said.

“‘Recency bias’ is also a behavioural issue among investors, where there is a tendency to overweigh the last bit of information they have received, while ‘herding bias’ is the urge to follow the crowd,” Ms Dawson added.

“For a long time we've been told to set aside emotion and stick to the principles - well that's true and logically that makes sense, but emotionally that's a very hard thing to do when there's uncertainty in the market."

She added, “To be a good behavioural coach you need to understand the hardwiring that we all have as humans that can make it very difficult for us to be disciplined long-term investors.

“We are really excited about the role that advisers can play in this space."

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