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Onscreen text: Asset TV. Interview with Omar Aguilar, PhD. Charles Schwab Investment Management.

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Gillian Kemmerer:    Welcome to Asset TV; I'm Gillian Kemmerer. Behavioral Finance is a topic that has been around for a long time, but it has recently come into high attention in the finance world. Today I'm joined by an expert on the subject, Dr. Omar Aguilar. He is the Chief Investment Officer for Equities and Multi-Asset Strategies at Charles Schwab Investment Management

Gillian:    Dr. Aguilar, thank you for joining us.

Omar Aguilar:    Thanks for having me.

Gillian:    You have a PhD in Decision Sciences, so how do behavioral finance principles impact your role as CIO?

Onscreen text: Omar Aguilar, PhD. Chief Investment Officer, Equities and Multi-Asset Strategies. Charles Schwab Investment Management.

Omar:    There are several ways that behavioral finance affects not only my role, but affects everybody. The first thing I say when we study behavioral finance is, we're all human. We all have natural biases that we're born with.

Omar:    Our study starts with looking at how the behavior of investors affect the markets. Part of my job as a CIO, it starts by understanding how different trends in the market are as a result of people behaving in different ways. How do people react to different news? How do people take different decisions at the wrong possible time?

Omar:    At the same time we tried to understand how our clients make decisions. Decisions are usually made in probably in the most difficult times, when they need the most help. Our job is to try to create solutions that allows them to prevent themselves from going against their own benefits.

Omar:    The study of behavioral finance has two main traits, which is, understanding behavior of markets, but also understand the behavior of decision-making by our clients.

Omar:    We have done a lot of research where it shows that investors make decisions, probably against their own benefit. That includes example like, trying to buy the market in 2000 when the market was at an all-time high. Trying to sell the market at all-time low when the market was out of the great recession in 2009.

Omar:    A few recent examples that have happened in literally in the last two years: On one hand we have what is called the hot hand fallacy. This is a typical anomaly that has been studied a lot where people basically follow what is hot. This is like the typical basketball player. You want to give the ball to the player that has the hot hand. We saw that trait going into the dividend yield and high yielding assets. People are starting to buy high yielding assets, despite the evaluation, just because it was working. We saw that trend reversing starting in the June, July period of last year, and basically had a pretty serious period of under-performance since then.

Omar:    On the other hand we saw what is called the overconfidence bias. Overconfidence is a scenario where you don't think you can be wrong. You actually like what you have. You continue to look at it because it keeps on working. Overall, what we have seen is investors are starting to go into that overconfidence, especially after the election. People have this euphoria of the new administration and hoping that a lot of these promises that go into the campaign will actually get done and therefore continues to look into the market. The market doesn't necessarily look at valuations, mostly because people are overconfident.

Omar:    Those are very typical behavioral finance examples.

Gillian:    There have been a lot of efforts recently to help educate financial advisors on behavioral finance. Why is it such an important concept for them?

Omar:    This is even more important now, especially with the rise of the robo-advisor. There's a lot of technology out there. Advisors start to migrate to the use of technology to try to help their clients, but what we try to do in educating advisors is to make them understand how important it is for them to get closer to the human beings. The combination of being closer to the clients, understand their behavioral nature as a human beings, how they make decisions with the leverage of technology is what creates long-term relationships. Helping advisors to develop those long-term relationships, it's what we try to do.
Omar:    This is even more important now because of the rise of robo-advisors. Advisors have a lot of tools at their disposal. They can use a lot of technology. In fact, they continue to grow their ability to use different services to try to solve their client needs. But it's very important this time and age to remember that advisors still have clients and they need to understand the human part of their clients. Clients like technology, clients like the use of technology, but at the same time, they still require somebody they can talk to. They want to talk to a human being, and because of that connection, it's actually very important.

Omar:    In this time period we see a significant amount of generational transfer. We see movement of capital going from Baby Boomers to Millennials and going to Generation X. During that intergenerational—understanding the key parts of how people make decisions, is even more close. Getting closer to the human part of the client is very important. So use technology, it’s great, but building a long-term relationship with a human is probably more important.

Gillian:    You frequently write and speak on behavioral finance. Can you share some of your most recent research?

Omar:    Yes. We have done a lot of research on behavioral finance. We try to understand the different biases that people have in making decisions. Lately what we have found is that generations make a big difference. We have seen a lot of different decision processes that go depending on what generation you are. If you're a Millennial, you actually sometimes behave like a Baby Boomer, and sometimes, if you’re a Baby Boomer, you behave like a Millennial. The combination of behavioral biases and generations is something that people need to understand better.

Omar:    The experiences that Baby Boomers saw and the way that they were raised and the way that experience they have throughout the process is actually very critical in how they will make decisions going forward. Baby Boomers tend to be more risk prone; they like to have trends. Baby Boomers because of the deficiency, they like competition. They like to see them succeed.

Omar:    On the other hand, we have Millennials. They have a different way to look at the world. They haven't lived high inflation. They don't know what high interest rates mean. At the same time, they tend to look at the world more from a more mission and purpose perspective and less about the competition. They have a more holistic look at the world, where, at the end, the environment is important, this socioeconomic environment, and their own impact into the world tends to be more important.

Omar:    The combination of demographics, generations, as well as behavioral biases is something that has been the focus of our research lately.

Gillian:    That's super interesting, and bringing the financial advisors back into the discussion, how do you help them address some of these biases in their practice?

Omar:    Yes. That's probably the most difficult part of it. Understanding the needs of your clients, usually it's a multidimensional exercise. On one hand you need to understand, what are the typical traits that behaviorally, your clients have? Is this a risk adverse clients? Is this somebody that really is going to be able to take more risk? Is this an overconfident client? And at the same time you have to link that into what kind of generation they belong.

There are certain Millennials that behave like Baby Boomer; there are certain Baby Boomers that will behave like Millennials. There's not a one size fits all for all the answers. What we have done is develop a tool that we call Biagnostics, that allows the advisors to understand a little better, what kind of client, what kind of situation they have, so that they can develop an asset allocation and a potential tool that helps them understand how to best serve their clients.

At the same time, we have developed a tool that allows them to give to the clients, so that the clients themselves understand what are the typical behavioral pieces. In many cases, educating the advisors and educating their clients help them and get a better relationship.

Gillian:    Where can our viewers go to hear more about your program?

Onscreen text: csimfunds.com/toolkit

Omar:    Yes, they can actually go to csimfunds.com/toolkit. In there, they can actually have a behavioral tool called Biagnostics, and in there, there's a set of questionnaires that they can actually use for themselves, as well as to give to their clients.

Gillian:    Excellent. Thank you so much for taking the time to share both your thoughts and some of your research today.

Omar:    No problem. Thank you for having me.

Gillian:    Of course.

Thank you for tuning in. From our studios in New York, I'm Gillian Kemmerer.

Onscreen text: The opinions expressed are those of Omar Aguilar and are not intended to serve as investment advice, a recommendation, offer, or solicitation to buy or sell any securities, or recommendation regarding specific investment strategies. Information and data provided have been obtained from sources deemed reliable, but are not guaranteed. Charles Schwab Investment Management makes no representation about the accuracy of the information contained herein, or its appropriateness for any given situation.

Charles Schwab Investment Management, Inc. (CSIM) is an affiliate of Charles Schwab & Co., Inc. and a subsidiary of The Charles Schwab Corporation.

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