Automating decisions may help advisers save investors from themselves

Market volatility — like last Wednesday’s 238-point drop of the Dow Jones Industrial Average and then Friday’s 208-point jump — alarms some investors. In turn, advisers often worry during these times of high market movement that they’ll hear from clients wanting to scrap their long-term plans and either bail out or go all in at the worst possible time.
Many advisers try to preempt such hasty — and very human — reactions with conversations about diversification, investment risk and return, historical investment patterns, and other logical approaches to keep investors from making poor financial decisions.
But some issues defy rationality when it comes to trigger points such as anxiety-inducing market drops. Given that researchers have shown there are more than 100 ways people tend to mess up their own financial futures, advisers’ logical conversations aren’t always enough to keep them on track, according to Daniel Crosby, a behavioral finance expert.
Investment management that embeds behavioral finance research and automatically accounts for the natural human tendencies may be a better solution, he said.
“The average investor loses 13% of their IQ in times of duress,” Mr. Crosby said. “So even if an adviser has done all the work to educate them, if it’s not baked into the process and woven through from front to back, it’s unlikely to stick when they need it most.”
He’s helped Brinker Capital, an investment management firm with $17 billion in assets under management, create a system for advisers that leads clients to create goals-based buckets and incorporates a multi-asset-class investment plan. The firm introduced the system 16 months ago, and Mr. Crosby and Chuck Widger, founder of Brinker Capital, will soon publish a book on the approach titled “Personal Benchmark: Integrating Behavioral Finance and Investment Management,” (Wiley, Oct. 20, 2014).
The approach focuses clients on why they are investing and automatically includes client risk tolerances and their personal tendencies about money into how they invest for a goal, Mr. Crosby said.
Specifically it includes a structure to help advisers guide clients into buckets, including ways of phrasing questions so that investors choose their best options. Personal Benchmark also includes a risk-return tool that will automatically adjust the underlying portfolios matched to the investor preferences.
“The things that mean the most to you can go a great way towards managing your bad behavior,” he said, referring to a focus on client goals. “And managing your behaviors is the most important thing you can do for your financial future.”
The bucketing approach has been shown to energize savings behavior and to keep investors in the market even when it seems “choppy,” he said.
(Read Mr. Crosby’s related blog: “The power of purpose: Benefits of goals-based investing”)
Martin Kurtz, founder and president of The Planning Center in Moline, Ill., said his firm has heard from some clients in recent weeks wondering if there’s something they need to do given the volatility of the markets on certain days.
The Planning Center uses a goals-based financial planning software program, and when clients call he reminds them of their long-term intentions. He sees the value in automation to keep out emotional reactions. His firm automatically rebalances portfolios each week.
“We try to build in as much as we can,” Mr. Kurtz said. “We don’t want a lot of human thought or judgment going in all the time.”
Mr. Widger said Brinker Capital’s approach to allow advisers to automatically incorporate and account for behavioral biases within the investment plan is novel.
“Many times over the past 30 years, investment management firms and the industry hold presentations and do a beautiful job explaining behavioral tendencies,” he said. “Then the adviser is left to go ahead and remember all that stuff and implement it in their daily practice; the adviser doesn’t have the bandwidth to do that.”