Behavioural finance- at look at investor decision making suitability and planning under stress

Financial Advisory

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Behavioural finance- at look at investor decision making suitability and planning under stress

Experts:         Neil Bage, Be-IQ
Facilitator:    Roderic Rennison, Rennison Consulting Ltd



“There is stuff which humans do well and stuff which machines do well. If we get them to work together – we get the best of both.” We think Gary Kasparov said something like this … but cannot find it anywhere… hey ho it makes sense.

  • Financial advice is the same as a medical diagnosis and prescription. A diagnosis alone is far too technical – it needs a prescription to enhance the advice. The tools may be able to support with the diagnosis, but you do not want the machine to give you a prescription because it involves individual human values and values require empathy.
  • Covid has shown that the existing profiling processes for clients are extremely limited. Within a span of weeks – not years – their financial situation has shifted significantly – and this shift has taken place simultaneously across your entire client base. 
  • We need to be able to communicate to each client as an individual – across their financial, behavioural, and emotional needs. 
  • As an industry, we have significantly underestimated the importance of assessing risk capacity in a comprehensive, quantitative, and dynamic manner … most approaches are highly inefficient, subjective, non-holistic, and static
  • At the moment, wealth managers carry out a fact find to create a map of the client’s balance sheet, but don’t use a comprehensive framework to turn this into an assessment of risk capacity … it’s too subjective and light touch; or, the alternative is an excessively onerous four hour stochastic modelling financial planning exercise which is valuable for some clients occasionally … but does little to deliver efficient or dynamic suitability. 
  • Covid has illustrated how there are times when understanding client behaviour is most important.
  • We cannot assess and track all our clients’ assets and liabilities, and then combine them all consistently into a holistic assessment of the overall situation; we need technology to help us do this. A system which is both biased and accurate. 
  • So, it is important to investigate what can technology do to support advisers (not to replace them

Points discussed

Neil began by taking the attendees through a short slide deck to highlight the behavioural challenges issues advisers and their clients face in reaching balanced and well thought through financial decisions. It is our behaviours that makes each of us what we are.

He highlighted:

  • The distinction between perception and reality. The completion of an Attitude to Risk questionnaire is based on client perception but there is rarely an element that addresses reality. Advisers are key in this process, as they know their clients.
  • In an evaluation/testing methodology developed by Be-IQ, the average difference between client perception of risk as typically measured by an ATR, and reality – defined as the anxiety/discomfort score is 22 points on 0 to 100 scale.
  • In relation to emotional complexity, with fear i.e. a real or perceived immediate danger, and anxiety – the possibility of a future threat or negative outcome, money is a significant issue to address.
  • Uncertainty. Complexity, and fear are the “perfect storm” in relation to decision-making.

What can be done?

  • During the current COVID pandemic, let alone an environment where information can be overwhelming, client neds more help than ever
  • Technology can never replace the human – at least not in some areas, but it has a role to play
  • Suitability needs to be suitable, i.e. it captures the beauty of the human
  • We need to learn about ourselves too; only then can we deliver empathy
  • There is a need to use evidence-based tools and solutions
  • Behavioural coaching skills are becoming ever more important.

Questions raised and considered

  1. Is risk tolerance a stable trait? In economic terms, yes, to some extent; in psychological terms, no, traits develop, on average, until over the age of 40, and are only embedded by the age of 50.
  2. How do biology and evolution impact on financial decisions? Our brains are not equipped to deal with the sheer volume of information now available and heuristics have emerged as an alternative set of simple psychological strategies for decision-making which ignore part of the information with the goal of making decisions more quickly, frugally and/or more accurately than more complex methods. In other words, they are mental shortcuts that allow people to simplify ways of making choices and decisions without spending an incredible amount of time and effort and energy.

  3. What is meant by the role of the navigator? What is meant in the context of advisers playing this role and to what extent should they control the flow of information to their clients? Clients need assistance and guidance in varying degrees, but it is important not to lead or influence them in ways where they do not make their own choices. For example, when a client completes an ATR, it should not be in the presence of the adviser and they should do so in an environment where they are not pressured and have time to think. Advisers should have self-awareness of themselves and how they relate to clients.