Post DOL Fiduciary Standard, Robo-Advisors Versus Real Advisors
April 7, 2016 by Charlie Gipple, CLU,®ChFC® - Senior VP of Sales & Marketing, Partners Advantage
This is an excerpt to the full whitepaper by Charlie Gipple:“What Robo-Advisors CanNOT Do That You Can An Introduction to Behavioral Finance”
Whether we are talking about life insurance sales, annuity sales or investment sales, one thing is indisputable, MONEY IS EMOTIONAL. I believe financial professionals can never be replaced, because “robo-advisors” cannot adequately help manage the clients’ emotions and behaviors! Here’s some insights into why.
Traditional Finance is what we have been taught. Traditional Finance would lead one to believe that helping our clients is more of a science than an art. This is the mathematically and scientifically fun stuff you read in the textbooks, such as efficient market hypothesis, correlation coefficients, charts, graphs, standard deviations, alpha, beta, and of course, the big one, Modern Portfolio Theory.
The Emotional Tail Wags the Rational Dog
Traditional Finance is the thought that what we doing financial services is more of a science than an art. I am a fan of “Traditional Finance,” and I have studied it a lot as I have a finance degree, two designations and four securities licenses. What does all of that mean, however? It means absolutely nothing, unless I can also help my clients with their behavior as well. Nothing else matters if investors’ behavior gets the best of them.
Furthermore, at the level of your client, these errors in their minds, in turn, can harm the success of a retirement and/or insurance portfolio. In other words, you as an agent/advisor can lay out a perfectly sound mathematical and scientific argument for your clients to either take action (buy insurance, for example) or not take action (buy and hold), but, if they have a “bias” in their mind that completely cancels out your rational argument, you are spitting in the wind.
In a world where supply and demand drives the price of multiple types of traded instruments up or down, when investors commit errors in thinking/judgment, the prices on these “traded instruments” tend to be different than what they would have been in an error-free environment. This is because the decisions of investors, whether rational or not, are what drive the prices of “investments” up and down. Bubbles and discounts do happen and have happened. The “rational models” have failed.
Therefore, you have this proliferation of behavioral finance. This is “the study of how finance is affected
by psychology. It attempts to understand a and explain how human emotions influence investors in their decision-making process.”
Now, why is behavioral finance a “new thing”? Why has it only been around for a couple of decades? Why have many agents never heard of behavioral finance? If it is so important now, then how have we lived without it for all this time? In other words, what is the paradigm shift that has taken place where behavioral finance should now be introduced into your practice when it was never a thought in previous years?
