Advisers hear ways to keep investors on track

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Posted: Saturday, October 5, 2013 12:00 am

Investors who fail to meet their financial goals can find good reasons by looking in the mirror.

“Investor misbehavior” cuts returns substantially, a financial psychologist said in Omaha Friday, and good financial advisers can keep their clients from making “boneheaded decisions.”

That includes confidently delivering the right information to keep clients on track, said Daniel Crosby of Atlanta, who counsels financial advisers on behavioral finance. An example of confident delivery: Jim Cramer, who discusses stock tips for CNBC and online.

Crosby cited a Barron's article that said the returns from Cramer's market picks lagged the stock market. Yet hundreds of thousands of people watch his cable TV program and pay attention because of how confidently he delivers his opinions, Crosby said, adding: “He is horrible with certainty.”

(Cramer is a market commentator, not a financial manager. His former hedge fund returned an average of 24 percent a year.)

Crosby spoke at a meeting attended by about 400 people at the Hilton Omaha of the Peak Advisor Alliance, a financial consulting group formed by Omaha financial adviser Ron Carson.

Crosby said investment clients err in three general ways, and the success of Cramer's confident delivery is an example of one reason for investor mistakes.

Clients want to be sure in their investments, and a confident, clear message is appealing even if it doesn't fit the clients' individual goals, he said. To keep clients on track, advisers must deliver the right information clearly and confidently so clients can be sure that the advice is sound.

Second, clients oversimplify information and come up with incorrect conclusions. That's easy to do when they are bombarded by so much vivid, “negative and scary” information, Crosby said. Financial advisers should help the clients understand which information is worth heeding and frame that information in the context of their goals.

Third, clients want to feel safe by “running with the crowd” rather than making independent decisions based on facts. Investors tend to feel more pain from losses than pleasure from gains, he said, and may seek a false sense of security by following what others are doing.

Crosby said investor errors are especially likely when the market is declining. “They lose it when they're under stress.”

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