The conflict between advisor and client
The paper deals with behavioral effects that seem to occur in an area of conflict between financial advisors and their clients. On the one hand, the advisors naturally help their clients to make better investment decisions, to survive turbulent phases and to maintain a long-term focus.
On the other hand, professional advisors are human and so their behavior is not always in the best interest of the clients. One reason for this as an example , maybe that they pursue their own goals, such as building and maintaining their client base. It can therefore be difficult to address unpleasant issues or new alternatives if they require their client to leave his or her comfort zone - even if it is in their own interest.
Financial advisors must make certain simplifications in their work in order to be able to complete various requirements in as reasonable a time as possible. That can be heuristics for faster decision making or empirical values like "common sense". However, unfavorable cognitive effects regularly occur in these subtle, non-quantitative areas. In addition, advisors need to trust their abilities to appear competent and convincing, which is an important factor in closing deals - but without drifting into unfavorable overconfidence.
The paper describes two concrete examples of cognitive effects:
Adherence to previous beliefs despite convincing evidence to the contrary in order to avoid cognitive dissonance.
Difficulties in distinguishing important from unimportant information, also as a result of past experience and current distractions.
Those advisors who have extensive knowledge and many years of experience can usually significantly reduce cognitive effects in themselves. Ideally, they also help their clients to make more rational decisions, for example by setting rules. This process is accordingly also called "debiasing".
While cognitive effects can be reduced relatively well, emotional effects are more deeply rooted and difficult to avoid. The reason for this is that the same information can be interpreted quite differently depending on the emotional state. In addition, we as humans prefer to feel good rather than bad. Therefore we want to experience things that are positive and hesitate to accept negative facts. A good example of this is that many investors are filled with pride when they sell a share at a profit, but regret having to exit at a loss - regardless of whether this is objectively the right decision.
Crisis phases are an additional emotional burden for financial advisors. The paper cites a study of the financial crisis of 2008/09, which found that 93 percent of the financial planners questioned had a medium to high level of symptoms similar to post-traumatic stress.
The paper also deals with approaches to solutions for selected effects. Five of the most important ideas are summarised below: