My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, April 22, 2019

What is your Wealth Advisor Thinking? One Professional Reveals Lessons Learned from her Clients

Getting professional wealth advice – or really any professional advice – can be frustrating. We are asked to open up our lives and disclose our thoughts to someone who is initially a stranger. Personally, I’d love to know what my professional advisors are thinking on a whole range of issues.

This week senior wealth advisor Carmen McHale of BDO Canada LLP takes a step from behind the desk to share her thoughts on the past five years of dispensing wealth advice. She also wanted to thank two colleagues – Indy Sebastian and Eric Wipf – for their help in reality-checking her thoughts.

When asked to write about what I have learned from clients in the past five years, my initial thought was – everything. But that might take too long to cover. So instead I’ll focus on one area that I find fascinating: the emotional biases I first learned of in textbooks and now see in investing practice. Emotional biases arise from impulse, intuition and feelings and can result in irrational decision-making. Because they are all about how we feel and react – they are impulses, after all – they are harder to mitigate.

Knowing ourselves is something many of us take for granted, feeling that it comes naturally – but how well do most of us actually know ourselves? We may think that there is no one we know better, but the truth is, we are often blind to our deficiencies. Despite our attempts to stay impartial, our emotions sway us more than we care to admit.

Loss aversion

When a decision is made to invest, it is usually based on what we think we will gain. Although a good advisor will focus on communicating the downside risks associated with investing, it is very hard to know how we will feel about that downside until it actually happens.

When it does happen – because it will – are we going to fall prey to our emotions, or will logic prevail? If your portfolio is down 10% and your advisor is telling you to stay the course, are you going to take that advice? If an investment results in a loss, will you be able to swallow the loss as a sunk cost and sell the investment – or will you want to keep it until it bounces back? Will you want to sell an investment too soon because you are afraid your gains will turn into losses?

So what have I learned? That no two families or situations are the same, and while logical reasoning attempts to quantify risk in an investment policy statement, often when faced with a real investment loss – the experience of seeing it – revisiting the investment policy statement reveals the tolerance for losses is lower than originally thought. With honest communication about how the investment policy is there in part to reflect the tolerance for risk, advisors can help keep a client’s plans on track.

Overconfidence bias

Overconfidence bias is thinking you know more than you do about a certain topic, or thinking you have more control about an outcome than you do. I have worked in Calgary for my entire career, and often deal with professionals in the oil and gas industry – they know the industry and believe in it. This leads them to over-weigh their investments. Their current and future income is based on the price of oil; add to that a large concentration of oil and gas stocks in their portfolio and the risk is amplified.

Unfortunately, this compounded risk reared its ugly head in the last few years in Alberta, setting many oil and gas professionals’ best-laid plans off track. The markets can take down anyone, regardless of investors’ level of knowledge.

So what have I learned? To present alternative scenarios. One that over-weights investments in line with the overconfidence bias and one with a balanced portfolio. Canadians have become better versed in the extremes of markets, and whether it be the oil and gas professional or the real estate speculator I have learned to discuss the lows with clients and hope that the risk and volatility resonates.

Self-control bias

As a lover of chocolate, I am very familiar with this bias. Time after time, I buy a bag of chocolate raisins and think I can limit myself to a handful. We tend towards immediate gratification.

In an investing context, there is the inability to focus on the long-term goals – like not saving enough for retirement and only realizing when you are 55 that you are running out of time. This can lead people to take excessive risks when investing. Clients often think that the markets will solve the problem if their portfolio can just get them a 15% return.

So what have I learned? That for the most part clients really just want to know where they stand. Given a detailed action plan, they can focus on short-term goals while understanding the long-term focus. I have learned I need to be the practical voice and provide the client with the tools and knowledge to make the right decisions, and be there for them along the way.

Regret aversion

This is all about not taking action because you do not want to be wrong – you try to avert regret. When you have this emotional bias, you are more likely to do what everyone else is doing. This can cause investors to over-concentrate their investments in well-known companies. Then, if the position goes down, it is not your fault because you were simply following the herd. Regret aversion is about avoiding making true decisions and then rationalizing the poor decisions that were made.

In these situations, I try to educate clients on the various investment management options that exist in the marketplace. Most are familiar with bank representatives and investment brokers where the advisors assess your risk tolerance, time horizon and performance objectives to determine which asset classes are most suitable - but investors ultimately make the buy and sell decisions, and the advisor’s role is primarily to offer an informed opinion.

On the other hand, I am a big proponent of discretionary investing, which is a more hands-off approach for the client. In discretionary investing, advisors still collaborate with the client to assess their investment goals. But it removes the ultimate investment decisions from the client and transfers them to the advisor, who communicates the investment decisions and reports the results. Discretionary investing provides the necessary framework around investment decisions and helps to remove many of the emotional biases surrounding investment decisions.

So what have I learned? That many clients like to have a “play” portfolio – where they can invest a specified amount of money in less popular companies. Clients enjoy the opportunity to do their gambling here without having to worry about their nest egg.

Status quo bias

This is the urge to do nothing. As human beings we typically dislike change. Staying with the status quo is much easier. People feel greater regret for bad outcomes that result from a new action taken than for bad consequences that come from doing nothing.

Changes from the status quo will often involve both gains and losses, but the tendency to overemphasize the avoidance of losses – loss aversion – will favour keeping things the way they are. This leads to inaction when action may be called for.

So what have I learned? That most clients meet with me to challenge this bias, and most people when given small, quantifiable actions generally want to challenge this bias.

Lessons and the investment journey

What have I learned from clients over the years? That even the well versed in the irrationalities of the market fall prey to the reality of emotions. And of course, as humans we are creatures of nature – so even when we do know our weaknesses, we may shy away from hearing hard truths. The fear of needing to break detrimental habits built up over a lifetime, or the realization that our behaviors have prevented us from meeting our financial goals.

One of the major roles we fill as advisors is that of the voice of reason. We strive to be the objective practical eyes, guided by experience, assisting our clients in navigating these biases in the context of their overall goals. We strive to help our clients understand that these goals are not achieved by leaps and bounds but by well-considered small steps – that proverbial journey of a thousand miles.

Carmen McHale is a senior wealth advisor for BDO in Calgary. She can be reached at, or by calling 403.956.0103.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

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