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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Behavioural Finance in Practice

An adviser notices that a client invests heavily in shares of his employer, Indian firm Sundaram Textiles, because he 'knows the company well' and feels it cannot go wrong. Which advice best addresses the behavioural issue while respecting suitability?

The adviser should recommend diversifying away from employer stock and explain that familiarity does not lower risk. Familiarity bias creates concentration, and holding employer shares ties both salary and investments to one company's fortunes, so spreading the money is the suitable response.

  1. AIncrease the holding since he has better information than outsiders
  2. BDiversify away from employer stock and explain that familiarity does not reduce concentration riskCorrect
  3. CMove all money to fixed deposits immediately
  4. DIgnore the holding because it is the client's own choice

Explanation

Familiarity bias leads to concentration, and employer stock also links job income and portfolio to the same risk. Diversification is the suitable remedy. Moving everything to deposits is extreme and ignoring the issue breaches the adviser's duty.

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