Behavioural finance experts have found financial advisers can give “remarkably different” advice from each other to the same clients based on factors including sleep or how long since the adviser last ate.
Oxford Risk studied 200 financial advisers giving advice to imaginary clients with the same information and said subsequent asset allocations were “scattershot”.
The implications for clients’ portfolios was “massive”, with on one occasion an imaginary client bracketed as high or low risk depending on the adviser.
Researchers said “noise” was a key factor in advice and was caused by irrelevant factors such as an adviser’s current mood, the time since their last meal, or the weather.
The research also found that adviser characteristics seemed predictive of recommendations. University-educated advisers made lower risk assessments than average, while married advisers were lower risk than single advisers, and those on salaries made higher risk recommendations than those on commission or fees
Oxford Risk said recommendations “were closer to totally random than totally consistent” and advocated technology such as algorithms having a greater role in delivering advice in order to deliver more consistency.
Greg B Davies, head of behavioural finance at Oxford Risk, said: “Like the Decision Review System used in cricket or the Television Match Official in rugby, technology can be employed to greatly increase consistency and accuracy.
“But in the end when the margins are extremely tight it should be the umpire’s call. So should it be in the world of investment advice.”
The report is called ‘Under the Microscope: Noise and investment advice’ and was carried out in partnership with South African firm Momentum Investments and South Africa’s professional body, The Financial Planning Institute.
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