According to Russell's March 2013 Financial Professional Outlook survey, advisors said clients largely perceive equity markets as scary when in actuality they should allocate to the asset class and stay the course. A total of 60% of advisors surveyed said the top reason clients strayed from their investment policy was to reduce exposure to risky assets.
For Mark Presley, a financial advisor for Raymond James in Birmingham, Ala., with roughly 100 clients nationally, the job of an advisor is 50% related to the market and 50% psychological.
"My job is to keep the client from hurting themselves. Each client is different because each one has their own fears," he said during a break at the Raymond James Conference, adding that recency bias is the most popular bias among his client. "They tend to hold onto what hit them last," Presley explains.
As cited by Russell's study, the most common client objective for deviating from their investment policy and objectives include a small reduction in exposure to risk assets (31%), a significant decrease in exposure to risk assets (29%), a small increase in exposure to risk assets (17%), and a significant increase in exposure to risk assets (4%). Eighteen-percent of respondents cited other reasons.
When asked for what most commonly prompted the client's request to make a change, 59% cited information they receive from non-professional sources like the media, family, and friends.
"I have more of a strategic outlook and advisors need to train clients to have a similar perspective," Presley said when aked about how he reacts to his clients listening to friends and family over his own advice. "You need to train clients to turn off the TV, quit reading so much, and take a long-term view. If I had it my way clients would get a quarterly statement instead of a monthly one."
Other factors prompting a client's push for a change to their portfolio, as demonstrated by Russell's study: Sixteen-percent of respondents said they misguided or forgot about the level of risk they said they wanted to take, with 8% saying they misguided how they will spend money in retirement. Advice from a different professional advisor was cited as the reason for just 1% of respondents and 16% cited other reasons.
When it comes down to it, investors are swayed by market performance and they have every reason to be fearful based on previous experiences in their financial lives. What they're looking for, according to advisors, is for leadership during tough times.
"As an advisor, you need to know what your clients' hot buttons are, and know that each one carries a scar--whether it's related to the 2001/2002 market crash or the 2008 financial crisis," Presley said. "If they really trust you with their life savings, they'll follow your lead...at least most of the time."