Individual investors have well-documented behavioral biases that can be detrimental to their investing health. Do financial advisors exhibit similar behavioral weaknesses?

The message from a recent book will sound familiar to regular readers of our publication, which often discusses the benefits of risk-mitigating portfolio strategies for investors.

I have long been a listener of Barry Ritholtz’s Bloomberg radio podcast “Masters in Business.” Ritholtz interviews prominent—and occasionally offbeat—figures from the fields of finance, business, journalism, and academia.

Ritholtz, an author and investment strategist, recently wrote a bestselling finance book, “How Not to Invest: The Ideas, Numbers, and Behaviors That Destroy Wealth―and How to Avoid Them.” He writes in the preface of the book,

Behavioral bias isn’t limited to retail investors

Some time ago, I wrote about the growing prominence of behavioral finance theory in the investment world and explored some common behavioral biases among self-directed investors. But what about financial advisors and other investment professionals? Are they similarly affected by biases?

Proactive Advisor Magazine has interviewed many financial advisors across the U.S. who subscribe to a disciplined approach to financial and investment planning for their clients. Yet many have discussed making past mistakes in investment judgment, process, or implementation. Research studies document that almost every textbook example of behavioral finance bias or emotional decision-making can be ascribed to financial advisors and other industry professionals at some point in their careers.

An article from the CFA Institute (home of the Chartered Financial Analyst credential) noted,

Three of these behavioral biases stand out from our discussions with financial advisors:

1. Trend-chasing bias. Today’s financial advisors have access to institutional-type strategies built with sophisticated algorithmic models by experienced third-party investment managers. In and of itself, that is a real plus for their clients. But advisors must still make fundamental portfolio allocation decisions—and sometimes they may “chase” the best-performing strategies from the previous quarter or year.

A senior executive at a prominent investment management firm explained,

A diversified portfolio of several different actively managed strategies that are not highly correlated, he added, can offer clients higher probabilities of success over the long term and throughout bull and bear market cycles.

2. Familiarity bias. Like retail investors, some financial advisors tend to stick with what they know. Third-party asset managers can offer strategies that encompass a wide range of asset classes, geographies, and investment styles (for example, mean-reverting versus trend-following, or even inverse to an index). It’s important for advisors to stay informed about new strategies, evaluate their pros and cons for their clients, and consider how each one might fit within a dynamic, risk-managed portfolio.

3. Herd mentality. This can manifest itself in different ways for financial advisors, most often prompted or reinforced by the behavior of their clients or their peers. In markets like that seen since April 2025, clients tend to become more return-oriented in their expectations as the market continues to make new high after new high.

Although these same clients may have explicitly agreed to an investment plan that was well-aligned with their risk profile and incorporated several strong elements of risk management, their devotion to a disciplined approach may start to waver in the face of a rising (or plunging) market. Advisors must consistently reinforce the long-term value of an actively managed approach designed to mitigate risk when markets inevitably turn or become volatile.

The CFA Institute once surveyed its professional readership to identify the behavioral bias that “affected their investment decisions the most.”

Source: CFA Institute Financial NewsBrief

Many experts agree that these types of biases are often most pronounced at market extremes. Investors of all types tend to take on too much risk in elevated markets and make poor decisions in volatile or declining ones. Nobel Prize–winner Richard Thaler has said, “Investors make mistakes—and they make mistakes because they are human.”

Rules-based, quantitative strategies can help take human emotion out of investment decision-making, both for financial advisors and their clients. They have been designed to perform competitively during favorable bull market environments and to aggressively manage risk in hostile markets. To take full advantage of such strategies over complete market cycles, the not-so-simple challenge for many financial advisors might be consistently applying their wisdom about client behavioral biases to their own investment management processes.

For those seeking additional perspective on this topic, I recommend an article by a behavioral finance expert and industry veteran, Richard Lehman, who explains why “The case for active over passive investing is really about investor behavior.”

The opinions expressed in this article are those of the author and the sources cited and do not necessarily represent the views of Proactive Advisor Magazine. This material is presented for educational purposes only.