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Overconfidence is one of the major behavioral biases among investors. It refers to a person’s overconfidence in one’s abilities or judgment. This leads the investor to believe that he is far better than others at something, whereas the reality may be quite different. Under the spell of such a bias, one tends to lower the guards and take on risks without proper assessment. It is important for an MFD to make the clients understand and overcome this bias. Cafemutual talked to a few prominent MFDs on how to help the investors conquer this bias. Here’s what they had to say:
Hyderabad MFD Opinder Jain of Fin Optic Capital Services believes that it is necessary for MFDs to let overconfident investors fall before advising them. He said, “While dealing with overconfident investors who may be over reliant on technology, an MFD should just give his advice and leave. It is necessary for MFDs to allow such investors to fall. It is only after this fall that they would understand the value of an MFD. Of course, it is also necessary for distributors to be by the side of such investors even when they endure a setback. Gradually, over time, an MFD should instill in the minds of such investors that just like you cannot be dependent on technology or the internet when you have fever and you need to consult a doctor, similarly, it is important to consult an MFD before making key investment decisions. Managing behavior of the clients and asset allocation are key areas of an MFD’s job.”
Trichy MFD Rajee Rajesh of Banconus Finserv believes that it is important to understand the perspective of overconfident investors before taking any corrective action. She said, “Even if an MFD believes that the investor has some bias which is incorrect, it is still important to hear such investors and then educate them. An MFD can also present scenarios to such investors on the possible effect of the decisions they take due to such biases. Sharing data that prove the incorrectness of such biases can also be helpful.”
Kolkata MFD Hitesh Jain of Finomatic Fintech Services also recommends a data-driven approach to overcome the overconfidence of investors. He said, “It is very important to give a logical explanation to overconfident investors which is backed by data. It is necessary for an MFD to communicate his rationale to surpass such biases. It is also important to deliver this rationale with assurance, confidence and authority to instill faith in the minds of investors.”
Mumbai MFD Gajendra Kothari of Etica Wealth Management believes that it is not possible for an MFD to convince such investors until they endure a setback. He said, “In the last 4 years, investors have not seen a lot of correction in the markets. They have become used to double digit returns. Due to this, investors have become overconfident and are not following asset allocation. It is only when the tide will turn, when such investors will realize that the markets are actually quite technical and cannot be expected to go one way all the time. Until then, it is necessary for MFDs to make sure that they communicate to such investors in writing so that they have proof that they gave adequate warning to investors on the possible risk of their investment.”
