Investors tend to be competitive when it comes to returns, and are attracted to riskier funds that promise higher returns. In addition, they often face the fear of missing out when their acquaintances end up getting high returns while they rue the missed opportunities.
IFAs have to often deal with such situations and make investors understand that returns vary and the only thing that matters is that the investor should be on track to reaching her goal.
Competitiveness is a character trait that can lead to innovation and improvement but high-competitiveness is also associated with poor interpersonal relations, dysfunctional impulsivity, and incidence of road rage and accidents, according to a white paper “Behavioral Finance for Financial Advisors.”
When investors compete with each other to find the hottest new investment, it stems back to FOMO or the fear of missing out. Investors don’t want to miss out on huge gains, and nobody wants to be the one left behind.
In their minds, the consequences of picking the “wrong” is losing the chance at unimaginable wealth—wealth that was never likely to begin with.
Greed is a high motivator, but one of the core beliefs that motivates this impulsive, competitive behavior is that there are examples of others who picked correctly and won the bet.
Overestimating the probability of an outcome based on the ease with which relevant instances come to mind is an example of the availability bias.
When individuals focus on the rare instances where speculative investing paid off, it increases the availability of those scenarios in investors’ minds.
To handle such situations IFAs must make their clients understand that what works for others may not be useful for them. How? By educating them that their goals, risk taking ability are unique to them.
“When investors turn up to us to enquire about lower returns as compared to peers, we just ask them whether they want the best fund or the right fund because the no.1 fund may be the best fund in a category but may not be the right fund for a particular investor,” says Sudhanshu Sekhar Mohapatra, a leading IFA from Bhubaneswar.
Often, these outsized returns come from products that quickly become the flavor of the season e.g. tech funds in 1999-2000, infrastructure finds in 2005-08 and more recently bitcoin. IFAs should show their clients historic data, which prove that these flavors of the season are merely enjoying transient popularity; in fact, such investment may not be suitable for them and the advice that has been tendered to them by IFAs is based on various parameters other than returns.
The parameters that go beyond returns are important and an IFA should be able to explain it to the client to gain their trust. Investors should be familiar with the vetting process and the parameters that are used to choose a particular fund so that they are comfortable with their decision.
