Advisers should recognise the cognitive bias their clients possess when formulating an appropriate investment strategy for an SMSF, an industry specialist has said.
“[In terms of cognitive bias] what we need to address is the fact that trustees are influenced by everything around them like all of us. It’s that whole confirmation bias; it’s prejudice that we see in the way that things are presented to us that make us make often rash decisions, but sometimes very successful decisions as well,” SuperGuardian education manager Tim Miller said during his organisation’s latest webinar.
“There’s that requirement on us, or that need for us, to take those biases, take what we’re seeing on social media or the news or wherever else it’s coming from, and turn them into positive messages, but also ensure our fund and our investment strategy is reflective of actual research we’ve done.”
Miller cited Bitcoin as an example of when cognitive bias can influence the type of assets SMSF trustees are keen to invest in.
“You see at the moment that a lot of people are going: ‘Wow, this is valued at $67,000. It was at $2000 10 years ago. I’ve got to get on board.’ [But the question has to be asked:] ‘Do you understand cryptocurrency?’” he said.
According to Miller, cognitive biases, such as the attraction to Bitcoin, should not necessarily be avoided as a major risk element, but do need to be reflected in a fund’s investment strategy.
He noted this could not be achieved using a generic investment strategy document that was deemed acceptable in the past. To this end though, he acknowledged a change in the general attitude toward this document will make it easier to manage cognitive bias.
“Administratively, and from a regulatory point of view and audit point of view, there was that blasé [attitude] towards [the investment strategy] for a long period of time. But now I think, more so, we have this willingness and preparedness to embrace it and use it for what its intended purpose is and recognising that it’s a far more fluid and liquid document,” he said.
