Why Human Investment Advice Still Matters

By: David Cantor

I have worked as an investment advisor in Santa Fe for twenty five years. My first client was my best friend from college. I worried that if I messed up I might lose our friendship. After a lot of pondering, I concluded that if I treated investing for him the same way I did for myself and my family, things would work out.

Other friends soon came on board: my realtor and her dad, the owners of two of my favorite restaurants. Clients were referred by my attorney and my mortgage broker. I joined forces with another advisor I’d met meditating at the Upaya Zen Center. Over the years our practice grew, but the focus on personal relationships remained at the core of our business.

When you work with a client for years, a special kind of intimacy develops. You share their triumphs and joys, as well as their worries and sorrows. I have mourned with clients who received a terminal diagnosis, with a father who lost a child, and a wife whose spouse passed unexpectedly. I celebrated with a couple who sold their successful business after a lifetime of work, with a single mom whose daughter got a full scholarship to college, and an artist whose collected works were acquired by a major museum.

These cherished relationships have sustained me over a quarter century, through four bear markets and the pandemic, through transitions in my business, and my own personal ups and downs.

The trust that my clients and I share has allowed me to help them navigate through market chaos when their own instincts told them to run for the hills, or talk them down when overoptimism tempted them to buy into the latest speculative trend.

But as artificial intelligence makes inroads into investing with automated “robo” investment platforms, financial planning, and widely available investment algorithms, many have questioned whether there’s still a role for human advisors. After all, computers can do much of this work for a fraction of the cost.

Machine based investment solutions can be a viable approach for some people. But I would argue that investing is an inherently emotional–and therefore human–business. When your investments rise or fall, it triggers neurochemical responses in your brain. Gains release dopamine and testosterone, resulting in feelings of satisfaction, increased confidence, and enhanced status¹. Excitement produces adrenaline which raises impulsivity.^{2 3 4} Fear of loss–or actual loss–hikes the stress hormone cortisol.⁵  

These fluctuations in neurotransmitters and hormones translate into emotions and behavior that can influence how people respond to market events. Greed can sometimes lead people to buy at the top of the market when they feel most confident, while fear can influence them to sell at the bottom when their stress becomes unmanageable.⁶ Life events too can trigger emotional responses that may affect investment choices.

Until a machine can replicate the depth and nuance of personal connection, I believe a human is likely to be the better advisor–however “intelligent” the machine may be.

When I sit with clients, I address them from the perspective of someone who knows their life story, their family, and their values and aspirations. I speak as someone who has guided them with their best interests in mind, and who they know and trust. Just as fear and greed can can influence decision making, a relationships based on trust, predictability, and consistency have been shown to affect emotional regulation. , helping to lower anxiety and reducing defensive decision making at critical moments.^{7 8}

It’s these human interactions that allow me to reframe a situation in a way that helps clients see things differently, or point towards a different course of action from the one their emotions were leading them towards.⁹ It’s about empathy, person to person connection, and understanding.

Security selection, asset allocation, regular rebalancing, and tax loss harvesting, are a big part of our job as advisors. Computers can do these things well, and many advisors are already incorporating these AI capabilities into their practices.

But at the end of the day, it’s my role as a human investment advisor that I believe matters most to my clients and helps guide their financial decisions. And it's the relationships with them that make my job so rewarding and motivate me to come to work every day.

 

Twenty five years later, my first client is still a client–and still my best friend.

 

Sources:

1. Knutson, B. et al. (2001). Anticipation of increasing monetary reward selectively recruits nucleus accumbens. Journal of Neuroscience.

2. Loewenstein, G., & Lerner, J. S. (2003). "The role of affect in decision making." In Handbook of Affective Science (pp. 619-642). Oxford University Press. 

3. Diamond, D., Campbell, A., Park, C., & Halonen, J. (2007). The temporal dynamics model of emotional memory processing: A synthesis on the neurobiology of stress. Nature Reviews Neuroscience, 8, 173–180. 

4. Patt, A. & Zeckhauser, R. (2000). Action bias and environmental decisions. Journal of Risk and Uncertainty, 21, 45–72. 

5. Patt, A. & Zeckhauser, R. (2000). Action bias and environmental decisions. Journal of Risk and Uncertainty, 21, 45–72.

6. https://www.redalyc.org/journal/5117/511766757004/html/

7. Kosfeld, M. et al. (2005). Oxytocin increases trust in humans. Nature.

8. Sapolsky, R. (2004). Why Zebras Don’t Get Ulcers — stress, predictability, and emotional regulation

9. Crockett, M. et al. (2010). Serotonin modulates behavioral reactions and impulse control. Science.

 

Disclosures:

• This material is intended for educational purposes only. You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. David Cantor is a Senior Vice President and Partner at EP Wealth Advisors, a registered investment adviser with the SEC. Registration of an investment adviser does not imply a certain level of skill or training.

• There is no guarantee nor is the intention of this article to establish any sense of assurance, that, if followed, the strategies referenced here will produce a positive or desired outcome. In fact, there is no guarantee or warranty that any of the steps detailed will enable the ability to achieve appropriate, successful, profitable or desired results. The possibility of unfavorable and unsuccessful results is not lessened by the information and strategies made referenced here.

• Hiring and/or working with a qualified financial advisor or financial planner does not guarantee success and does not ensure that a client or prospective client will experience a higher level of performance, results or level of service. No guaranty or warranty is made that any results, projections, or other information being represented directly or indirectly here will be met or sustained.