Value of an Advisor: B is for Behavioral coaching

by Maria Nastasi, Russell Investments

Executive summary:

• Humans are often led by their hearts and not their heads, especially when faced with volatile markets
• An advisor's role as a behavioral coach is crucial to keeping investors from acting against their own best interests
• Investors left to their own devices often chase performance, buy high and sell low, or make other decisions that could impact their long-term wealth
• Keeping an investor on track with their goals is one way that advisors provide value

Because investing is not just about money

This year has been tagged "the election year." Globally, more voters than ever will head to the polls. So far, consequential outcomes have occurred in the European Union, Mexico, and India. There are many more to come, including in the U.S. With so much uncertainty in the political landscape, investors may be nervous—and they may be reluctant to remain in the market.

This is why an advisor's role as a behavioral coach is so important. Humans are emotional creatures. We often like to think we make rational and logical decisions. But the truth is we are often led by our hearts and not our heads. Between our emotions and unconscious behaviors; we are susceptible to making decisions that could potentially negatively impact our investments and the long-term health of our wealth.

This is why, at Russell Investments, one thing has never changed: our commitment to realizing and valuing the importance of advisors' role in clients' lives. We are so steadfast in this belief that we release an annual Value of an Advisor study. The study quantifies the tremendous value you bring to the client relationship through four pillars: A for active rebalancing and asset allocation, B for behavioral coaching, C for customized wealth planning, and T for tax-smart investing.

We have conducted this study for 11 years now, and for the last few years, the B component has provided the highest value of the formula.

We've already discussed the value of active rebalancing in the first article of a series we will produce that deep-dives into each component. In this blog, we'll look at the value of the behavioral coaching you provide to keep your clients from making decisions that go against their best interests.

Without you, the advisor, your clients are more likely to pull out of volatile markets, follow the herd on a popular investment, or buy at the market peak and sell at the bottom, among other well-known behavioral mistakes.

Investors left to their own devices are often prone to chase performance. Similarly, investors are prone to vote with their feet when markets get difficult. To illustrate the point, look at the chart below, which shows the flow of money into and out of U.S. open-ended mutual funds and passive ETFs (Exchange Traded Funds) over the 20-year period ending December 2023.

Investors don't always do what they should

Recent demonstration of a "buy high and sell low" mentality
2007 - 2023 U.S. open ended mutual fund and ETF flows vs. market

Click image to enlarge

Data shown is historical and not an indicator of future results. Sources: Morningstar Direct. Flows include active and passive categories: Monthly open-end mutual fund and ETF flows. Data as of December 2023. U.S. Stocks represented by Russell 3000 Index. Index performance is not indicative of the performance of any specific investment. Indexes are not managed and may not be invested in directly.

As you can see, the flows into mutual funds and ETFs lagged the blue line both up and down. That means investors bought into the stock market after it had already begun to climb and sold after it started falling. In other words, they bought high and sold low.

Human behavior is a fascinating topic. For many years, experts have studied and identified over 200 behavioral biases. These biases can be influenced by factors such as past experiences, conscious or unconscious beliefs, and what is happening around us at any given moment.

That's just some of the "noise" we are exposed to. Our clients also receive information about the latest and greatest from friends or family members.

While this year may be one of political uncertainty, something could always make investors wary of the markets. If we stack rank the doom and gloom headlines, we can be forgiven for some of the decisions we or our clients may have made when it came to our investments:

• War in the Ukraine – 2 years and counting
• War in Gaza and Israel – 6 months and counting
• Soaring inflation and the increase in the cost of living
• Talk of recession

Markets can be unpredictable. However, their long-term trend has been up. Remember that the S&P 500 Index has finished the year in positive territory 74% of the time since its inception in 1926. Human behavior is manageable – if we understand it. Investors who are guided by advisors—and stick to their plans—are likely to benefit.

We believe that being a behavioral coach to your clients is one of your most important roles as an advisor. Helping clients understand and address their emotions may limit the emotional decisions that can damage an investor's long-term financial plans. By doing so, clients are given the best chance to reach their financial goals.