Dan Egan, over at Betterment, just posted a great article titled High Frequency Monitoring: A Short Sighted Behavior. It’s worth reading the whole article but the summary is this: Investors who check their accounts more frequently typically have higher behavior gaps…meaning their investments returned much higher than what their personal take home return was.
The reasoning is simple – most of us are loss averse. Seeing our portfolios drop in value is painful. The more you log in to monitor your portfolio, the greater the chance you will see a loss. This creates bad feelings and emotions and bad behavior usually follows those feelings and emotions.
Without getting all Behavioral Finance on you – I wanted to touch on one thought his article initiated. How do you define transparency?
If your an adviser and define transparency as quick and easy access to view your accounts, you’re providing no value that others cannot. More importantly, you’re probably making your job much harder then it already is.
The definition of transparency should go much deeper than easy access. It should involve the education and understanding of the what and why inside portfolios. Clients should understand the structure of their account when they log in. What exposure do we have and why? How do you approach the markets and a general understanding of the evidence supporting that?
A big part of any adviser’s job is to equip their investors with information needed to protect them from the behavioral risks that are always present. Not an easy task, but one that should be approached with discipline and consistency. If done correctly, transparency takes on a new meaning and becomes much less of a risk and becomes the value add it should be.