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

An adviser notices that Mr. Iyer, a client, increased his equity allocation sharply after three consecutive years of strong market returns, despite his stated moderate risk profile. The adviser wants to counter this using a practice-based approach. Which step is most appropriate?

The adviser should rebalance to the agreed strategic asset allocation documented in the investment policy statement. This uses a rule-based process to counter recency bias and return chasing, keeping the portfolio consistent with the client's moderate risk profile rather than recent market performance.

  1. ARebalance to the agreed strategic asset allocation using a written investment policy statementCorrect
  2. BIncrease the equity allocation further to match recent returns
  3. CStop all communication until markets fall
  4. DMove the entire portfolio to cash to teach the client about risk

Explanation

Recency-driven overconfidence is best managed by anchoring decisions to a documented policy and rebalancing to targets. Chasing returns worsens the bias, and going to cash or withdrawing contact is not a disciplined, suitability-based response.

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