Matt Tucker, CFA, a portfolio manager at Black Rock in the iShares ETF division, recounts his personal experience trying to purchase a municipal bond for his own account. His story highlights the absurd markups and lack of transparency that pervade the retail bond brokerage business. I have personally had virtually the same experience, except that my broker was embarrassed and seemed genuinely surprised by his own dealer's total lack of regard for clients.
Michael Pompian, CFA, CFP, writes at the Morningstar Advisor website about irrational behavior that can adversely affect investment decisions. Pompian, who is based in St. Louis, is an investment consultant to ultra-affluent clients and family offices. He is the author of the book Behavioral Finance and Wealth Management.
Ironically, Pompian's audience is professional advisors. Although he does not mention it in the article, academic research during the past three decades has shown that behevioral biases have a significant adverse effect on investors' portfolio returns. Individual investors are especially vulnerable and should take note.
Listed below are the seven biases that Pompian describes in his article, which can be read in its entirely here.
Loss Aversion Bias: The pain of loss is greater than the pleasure of gains.
Anchoring Bias: Fixating on a particular price in making (or not making) an investment decision. An example is an investor who waits for the market to drop before selling, or who waits for a losing investment to "get back to even" before selling.
Hindsight Bias: The belief, after the fact, that investment outcomes were easily predictable.
Recency Bias: Taking action based on recent events rather than evaluating the current situation in a historical context.
Representativeness Bias: Making current investment decisions using empirical results for similar investments as a frame of reference.
Status Quo Bias: A pitfall of the "lazy investor" --- not taking action when action is warranted.
Regret: Poor results in the past bias future investment decisions.
Working with a professional advisor who understands these biases is one way of addressing these risks, most of which can be overcome with a well-crafted, systematic approach to investment management. Please feel free to contact us with any questions or comments.
"How to Build Your Financial Dream Team" is the headline of a Weekend WSJ article that discusses how to select and hire your financial "Trust Team" --- your financial advisor, accountant, and attorney.
Karen Blumenthal outlines a number of factors that individuals should consider when evaluating prospective financial advisors. As she correctly notes, "Just about anyone can hang a shingle and offer financial advice with fairly little training or experience. Registered investment advisers, CPAs and lawyers—those who are paid to give investment or other advice—have a fiduciary obligation, or a legal requirement to put their clients first in making financial decisions. Stockbrokers and other advisers have only an obligation to recommend options that are "suitable" for you, a far lesser requirement." Hiring a fiduciary does not ensure that you will receive good advice from a competent advisor, but not hiring a fiduciary guarantees that your advisor has no obligation to put your interests before their own. Read Ms. Blumenthal's full Wall Street Journal article here. If you like what you read, you also may be interested in our list of Ten Questions to ask before choosing a financial advisor.
