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Recognizing Follower-Type Clients

Followers tend to be dissociated from the investing process, preferring instead to take the easier--and often mistaken--route of following the crowd.

Michael M. Pompian, 06/19/2014

This month's article is the sixth in a series called "Deep Dives into Behavioral Investor Types." This series is intended to help advisors create better relationships with their clients by deeply understanding the type of person they are dealing with from a financial perspective and adjusting their advisory approach to each type of client.

As we learned in the last series, there are four behavioral investor types (BITs): the Preserver, the Follower, the Independent, and the Accumulator. If you missed any of these articles, you can find them in my article archive on MorningstarAdvisor.com.

In this series, I am covering each BIT in three parts:

--Part I will be a diagnosis of each BIT and discussion of its general characteristics 
--Part II will be a deep dive into the biases of each BIT. 
--Part III will be how to create a portfolio for each BIT. 

This article is Part II of the Follower BIT.

Biases of the Follower BIT
As previously reviewed, the biases of Followers tend to be cognitive --relating to how people think--rather than focusing on emotional aspects--relating to how they feel. The biases of the follower BIT are framing, recency, hindsight bias, cognitive dissonance, and regret biases.

In my experience, I have found that two biases have a substantial impact on Follower behavior: recency and framing.

Recency Bias
Bias Type: Cognitive

The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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