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Financial Planning Is your client prey to hindsight bias?

Is your client prey to hindsight bias?

Making an investment decision based on past experience can cause financial problems. Find out how to deal with clients with cognitive bias.
Team Cafemutual May 30, 2018

I knew India would win the match.

I knew it would rain today.

I knew I would ace the exam.

The situation may be different each time, but we hear ourselves say it over and over again: “I knew it all along.” The problem is that too often we didn’t actually know it all along; we only feel as though we did. This behavioural trait is called ‘hindsight bias’ or ‘know-it-all-along effect.’

Generally, after an event has occurred, such people tend to believe that the onset of that event was predictable whereas in fact, it could not have been predicted reasonably. They tend to find causal connections where none exist and this can affect how we interpret not only a past event, but future ones as well.

This indicates that usually by overestimating the accuracy of past events, investors become over confident and make decisions and design portfolios with too little consideration of their own risk or goals. This leads to poor results.

Hindsight bias can also affect your relationship with your client; if your client believes you should have been able to accurately forecast market performance, they could lose confidence in your abilities and advice if things do not turn out as desired. Very often, advisors receive calls from their clients who suffer from hindsight bias and take decisions by connecting the past and future. This in turn has a major impact on their investments.

We spoke to a few IFAs to understand how they deal with such hindsight bias.

Suresh Sadagopan, of Ladders7 Financial Advisories, says he generally draws the client’s attention to the decisions which they have taken in the past. “Life is never linear or predictable. Only after a certain period, you will know if the decision you took was good or not. With hindsight bias, clients generally think it’s simple to decide, but it is not,” he says.

Suresh likes to quote the example of gold funds to explain matters. In 2010-11 gold was doing exceptionally well and people started investing in gold funds. Now the decision does not look great as they just got 3-4% return in gold. “I generally go back and speak to clients about their decisions which they have taken and speak about both the positive and negative outcomes of the same,” he added.

Amit Bivalkar, of Sapient Wealth Advisors, believes clients should focus on tweaking their own portfolios. He says, “Clients start believing that they can avoid scams based on their past experience, which is not true. So, adjusting your investment behaviour to your time horizon and maintaining asset allocation are the key factors, which I explain to my clients to deal with hindsight bias.”

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1 Comment
Felix Zeman · 3 weeks ago
Please read my provider's BG/SBLC Sale Transaction Procedure below and see if it will suit your requirements.


                                                                               PROCEDURES:

1.    Buyer submits Letter Of Intent (LOI) with full banking coordinates (there must be sufficient cash funds in this account), Enlarged 140% Colour copy of Passport , Client Information Sheet , Certificate of Incorporation (if applicable), Corporate Resolution (if applicable), Non-Solicitation Statement, and an Irrevocable Fee Protection Agreement .

2.    After conducting due diligence, the Seller will countersign the LOI and return it to Buyer including details of the BG Issuing bank, and Seller’s Passport copy. This LOI automatically becomes a full commercial recourse contract and will be notarized to avoid contract breach and Buyer will be required to take care of notarization expenses of the contract documents here in UK. After notarization of the contract documents here in the UK, both parties shall lodge the executed contract with their respective Banks.

3.    Within two (2) banking days, the Seller’s Bank shall send a PRE-ADVICE SWIFT MT199 or MT-799 to the Buyer’s Bank. (EXHIBIT A )  The PRE-ADVICE shall be valid for  four (4) banking days only.

4.    Within the same banking day, the Seller shall email a courtesy copy of the PRE-ADVICE SWIFT MT199 or MT-799 to the Buyer for confirmation. Within three (3) banking days after authentication of the PRE-ADVICE SWIFT MT199 or MT-799, the Buyer’s Bank shall reply and send a  SWIFT MT-799 to the Seller’s bank and a courtesy copy shall be sent  to the Seller’s email.

5.    Within three (3) banking days, after authentication of the Buyer’s SWIFT MT-799, the Seller’s BG Issuing Bank shall send the Bank Guarantee via SWIFT MT-760 to the Buyer’s Bank  ( EXHIBIT B ) and a courtesy copy shall be sent to the Buyer’s email. The Buyer’s bank verifies and authenticate the BG sent via SWIFT MT-760.

6.    Within three (3) banking days, after authentication of the BG sent via SWIFT MT-760, the Buyer shall send payment to the Seller via SWIFT MT-103 and concurrently pay Consultants commission fees of Two Percent of each tranche face value. Courtesy copies of the commission payments shall be sent to the respective consultants/beneficiaries and their paymasters.

7.    Within seven (7) banking days after authentication of receipt of payment to the Seller, the Seller’s BG Issuing Bank shall send the hard copy of the BG to the Buyer’s Bank  via Bank Bonded Courier.

8.    All subsequent tranches will be based on the same procedures until collateral or funds become exhausted.

9.    Any unauthorized calls by any party or its representative lawyers to probe or communicate in an improper way to bank(s) in this transaction shall be prohibited and contract terminated.

10. Please, Ready, Study and Understand VERY WELL, we will work STRICTLY base on this Transaction Procedure.

THIS TRANSACTION PROCEDURE IS NON NEGOTIABLE, DO NOT RESPOND IF NOT ACCEPTED.

Contact Me Via Email:- bfltd2011@gmail.com

I look forward to a mutually beneficial business relationship.

Sincerely,

Felix Zeman.
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