BeFi Barometer 2020

Behavioral Finance Techniques Help Advisors Keep Clients Invested Through Market Volatility

More financial advisors are using behavioral finance techniques compared to last year – and they are reaping the benefits, according to the BeFi Barometer 2020, the second edition of the survey commissioned by Charles Schwab Investment Management, Inc. (CSIM) in collaboration with the Investments & Wealth Institute and Cerulli Associates. Eighty-one percent of advisors surveyed said they are using behavioral finance techniques in client communications and interactions, up from 71 percent a year ago. Behavioral finance users said it helped them keep existing clients invested during this year’s unprecedented volatility, and 66 percent reported gaining clients since the first quarter of 2020 compared to only 36 percent of advisors who do not use these techniques.

“Advisors are guiding clients through an unprecedented market environment and emotions are running high,” said Omar Aguilar, PhD, Chief Investment Officer of Passive Equities and Multi-Asset Strategies at CSIM and a practitioner of behavioral finance in asset management for over 20 years. “Keeping clients focused on long-term plans and goals while mitigating their own biases through the uncertainty we are experiencing today is no small task. Keeping a disciplined approach and a clear communication plan are critical elements to helping clients achieve their financial goals. It is exciting to see that advisors are recognizing the value of putting behavioral finance concepts into their practice.”

The Benefits of Behavioral Finance

Against the backdrop of increased market volatility in early 2020, advisors reported the greatest benefits of using behavioral finance included:

• Kept clients invested during market volatility (55%)
• Strengthened trust and relationship with clients / increasing client retention (48%)
• Better managed client expectations through effective communication (40%)
• Reduced short-term or emotional decision making (37%)
• Developed better understanding of clients comfort levels with risk (33%)

Behavioral Finance blossoms in advisor practices

Advisors are increasingly incorporating behavioral finance within the context of client communications and portfolio construction.

Frequently / Always use behavioral finance			2019			2020
Client communications / interactions			71%			81%
Portfolio construction			58%			62%

Notably, those who use behavioral finance were almost twice as likely to gain clients after the first quarter of 2020 as advisors who did not use behavioral finance (66% vs 36%).

“Behavioral finance is always relevant, but this moment really brings to life the impact it can have on an advisor’s practice,” said Asher Cheses, Research Analyst, High-Net-Worth at Cerulli Associates. “The results of this study bode well for increased adoption of behavioral finance programs going forward.”

Behavioral Finance users on the front foot

Advisors who use behavioral finance reported a greater focus on more proactive investment activity since Q1. They engaged in tax loss harvesting and increased opportunistic active investments at higher rates than non-users. Non-users were more likely to focus on reactive, de-risking activities for client portfolios, including moving money into more conservative investments and increasing downside protection.

How advisors say client investment activity changed since 1Q 2020			User			Non-User			All
Maintained strategic allocation			50%			59%			53%
Used opportunity to use tax-loss harvesting			53%			44%			50%
Made incremental additions to depreciated asset classes			37%			38%			38%
Increased allocations to active managers who may outperform given current conditions			28%			22%			26%
Reduced risk assets/moved money into safer investments			23%			29%			25%
Increased individual stock allocations			22%			19%			21%
Increased downside protection (e.g., derivatives/options)			14%			23%			18%
Moved assets to lower-cost (passive) options			9%			3%			7%

“Behavioral advisors tend to make proactive changes to clients’ portfolios based on more fundamental factors like long-term financial goals, rather than transitory factors like short-term market swings,” said Devin Ekberg, CPWA, CIMA, CFA , chief learning officer and managing director of professional development at the Investments & Wealth Institute. “It is exciting to see that many practitioners are living and breathing the principles of behavioral finance for the benefit of their clients.”

Focus on Client Biases

Similar to 2019, advisors cited recency bias as the most common client bias they observe, followed by loss aversion and familiarity bias. There was also a notable increase in the number of advisors that reported clients exhibiting framing bias and mental accounting compared to last year.

Clients Significantly Exhibit…			2019			2020
Recency Bias: Easily influenced by recent news events or experiences			35%			35%
Loss Aversion: Playing it safe or accepting less risk than they should tolerate			26%			30%
Familiarity/Home Bias: Preference to invest in familiar (U.S. domiciled) companies			24%			27%
Framing: Make decisions based on the way the information is presented			17%			26%
Mental Accounting: Separating wealth into different buckets based on financial goals			15%			26%

The full findings from the BeFi Barometer 2020 are discussed in the white paper, “The Evolving Role of Behavioral Finance in 2020,” and are available at www.schwabfunds.com/befibarometer or at https://content.investmentsandwealth.org/befi2020.

About the Study

Charles Schwab Investment Management, in collaboration with the Investments & Wealth Institute (IWI), retained Cerulli Associates, a leading independent market research and consulting firm, to learn how advisors view and use behavioral finance when working with clients. This second edition of the survey, the BeFi Barometer 2020, was conducted by Cerulli Associates in May and June 2020 and reflects the views of over 300 advisor members of the IWI. Respondents were diversified among business models including Wirehouse, Registered Investment Advisor (RIA), and National/Regional broker dealers. All data is self-reported by survey participants and is not verified or validated.

About Cerulli Associates

Headquartered in Boston with offices in London and Singapore, Cerulli Associates is a global research and consulting firm that provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments. Cerulli's research product line includes the Cerulli Report series, the Cerulli Edge series, and Cerulli Lodestar.

About Charles Schwab Investment Management, Inc.

With a straightforward lineup of core products and solutions for building the foundation of a portfolio, Charles Schwab Investment Management advocates for investors of all sizes with a steadfast focus on lowering costs and reducing unnecessary complexity. As of June 30, 2020, Charles Schwab Investment Management managed approximately $524.7 billion on a discretionary basis and approximately $16.9 billion on a non-discretionary basis. More information is available at www.schwabfunds.com.

About the Investments & Wealth Institute

Established in 1985, the Investments & Wealth Institute, formerly IMCA, is a professional association, advanced education provider, and standards body for financial advisors, investment consultants, financial planners, and wealth managers who embrace excellence and ethics. Investments & Wealth Institute administers three certifications, Certified Investment Management Analyst (CIMA), Certified Private Wealth Advisor (CPWA), and Retirement Management Advisor (RMA). Through its publications, live events, online courses, assessment-based certificate programs, and advanced certifications, the Institute delivers premier-quality, practical education to advanced practitioners in more than 39 countries.

CSIM is not affiliated with Cerulli Associates or the Investments & Wealth Institute.

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