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   small talk
                The influence
of social networks
Clients may arrive in your office (or
on your screen) with their heads full
of investment ideas. A recent paper on “social finance” from the National Bur- eau of Economic Research explains why.
“Social Finance,”
by Theresa Kuchler and Johannes Stroebel (both from New York University’s Stern School of Business), was pub- lished in the NBER Working Paper Series in Oct. 2020
Industry talk with new and veteran advisors
What attracted you to
financial services and
how does that attraction
influence your practice?
 “Classic models of economic behav-
iour have not traditionally featured a role
for social interactions between individ-
uals,” authors Theresa Kuchler and Johan-
nes Stroebel wrote. “But, as Aristotle
famously noted, humans are, by nature,
social animals. As a result, interactions
with other individuals are likely to influence most decisions we make through a variety of channels beyond market prices.”
I’ve always been interested
in reading about investing and legends like Warren Buffett. Learning about the impact of the 2008 financial crisis also drew me in.
Mark Walhout
Walhout Financial and Investia Financial Services, Markham, Ont.
  The authors reviewed social finance research and described the forces competing to influence clients’ financial decisions.
The influence isn’t always positive. Peers provide useful infor- mation but also “distort investment and borrowing decisions due to social comparisons, belief contagion, and investment or con- sumption due to a fear of missing out,” the paper said.
One of the papers surveyed found that investors who live near each other are more likely to purchase the same stocks. Another found that people were more likely to invest in stocks when their peers had recently seen higher returns.
While those findings covered retail investors, professionals also aren’t immune to social pressures. Fund managers who reside in the same neighbourhood tend to overlap in their invest- ment choices, one paper found. “These correlations are also larger when managers share a similar ethnic background and are therefore more likely to interact with each other due to well- documented homophily in social networks,” the authors wrote.
They also highlighted research that used Facebook data to show how institutional investors are more likely to invest in firms based in regions where they have social ties. This goes beyond the traditional “home bias” effect that results from geo- graphic proximity, the paper said, to include digital ties.
Social groups also affect spending. Data from Canada show that borrowing and bankruptcies increase among a lottery win- ner’s neighbours as they spend conspicuously to keep up with their peer’s sudden wealth. A similar study showed that neigh- bours of lottery winners in the Netherlands spend more on cars.
How to compete with these irrational forces? One method may be to simply explain their existence. Clients may find it easier to avoid potentially damaging behaviour when it’s described neutrally as something other people do — even professional investors.
The challenge for advisors is that friends, colleagues and family are often seen as a source of unbiased information and advice, the authors wrote, whereas advisors may “have real
or perceived conflicts of interest with the individuals they are supposed to advise.” Being frank about potential conflicts could mitigate this effect. —Mark Burgess
When I started considering
my career, I saw huge oppor-
tunity in financial planning. Financial needs weren’t being met with products; you can invest properly for a client only after effective planning that incorporates goals and dreams. The potential to combine professional investing and planning ultim- ately attracted me and still drives me.
Within planning, I’m focusing more on risk management — maybe motivated by the pandemic. Are clients prepared for illness or death? Do they have insurance and a will? Although I’ve always considered these things, I’ve become more per- sistent about them. And, because of 2020, it’s easier to bring these topics up; clients are more willing to acknowledge that the unexpected can happen quickly.
What attracted you to financial services and did that attraction prove lasting?
Early in my career as an estate
administrator at a law firm, I was often left with a mess — incom- plete wills or a failure to name beneficiaries. I had to process these documents as they were, when changes would have made a huge difference to the family or other survivors.
Dawn Hawley
Angus Watt Advisory Group
at National Bank Financial, Edmonton
   When I collaborated with an executor who was a certified financial planner (CFP), he encouraged me to become a planner too. I liked the idea of building on the knowledge I had. I became a CFP and, shortly thereafter, a salaried planner at a firm — rare at the time. When I became a regional director, I helped train other planners and also taught courses toward the CFP, which made me a better planner.
The attraction has lasted: I make a difference in people’s lives by designing and implementing estate plans for smooth execution. —Michelle Schriver

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