Q: What’s the importance of behavioural finance to wealth managers?
A: Wealth management is behavioural finance at heart and that is what makes being an adviser such a challenging job. Helping investors find the right destination, the best path to get there, and managing their behaviour along the way, is hard.
Behavioural finance has to be built-in rather than bolted on. A holistic wealth management relationship has to acknowledge psychological differences between individuals when you build and monitor portfolios, and when you communicate performance and risk information.
A holistic wealth management relationship has to acknowledge psychological differences between individuals when you build and monitor portfolios, and when you communicate performance and risk information
One client’s medicine is another’s poison; what may dampen one client’s anxiety may ignite another’s, just to briefly consider the communications side of things. Oxford Risk’s behavioural profiling technology establishes each investor’s financial personality on up to 20 stable dimensions to determine likely causes of emotional discomfort and pinpoint preventative measures.
Q: What are the dangers of neglecting behavioural finance factors?
A: The worst outcome is of course that an investor completely panics and acts contrary to the plan because their emotional comfort hasn’t been adequately addressed. There is nothing rational about offering a theoretically perfect solution in the knowledge that, as an imperfect human, the investor will fail to last the distance.
There is nothing rational about offering a theoretically perfect solution in the knowledge that, as an imperfect human, the investor will fail to last the distance
The rational path is to provide an accurate scientific diagnosis of the best strategy each investor can stomach, and then offer an appropriate prescription, be it changes to the portfolio, to its presentation, or to the decision-making process and interactions that define the adviser-client relationship.
Top Tip
Lee Goggin
Co-Founder
Q: So, you’d advocate greater empathy in investing?
Certainly, real thought should be put into the investor journey. Good investing outcomes are not achieved by merely “optimising” risk-adjusted returns. People like to invest in narratives, rather than numbers, and they typically want an investment journey which feels comfortable throughout.
Good investing outcomes are not achieved by merely “optimising” risk-adjusted returns. People like to invest in narratives, rather than numbers, and they typically want an investment journey which feels comfortable throughout
Advisers need to diagnose each investor’s recipe for emotional comfort, and proactively secure it ahead of the journey in a planned, personalised, precise and low-cost way. This maximises the real-life returns that investors actually care about: the anxiety-adjusted returns that account for the emotional costs of ownership.
Q: On the flipside, what role can technology play in making us better investors?
In high-stakes decision-making environments, humans need help. With the right data, the right design and the right digital support, decisions can be made both more efficiently and more effectively. You are seeing this kind of assisted decision-making in all kinds of fields today.
In healthcare, doctors leverage data-processing technology to supercharge the diagnostic process. Doctors still call the shots and manage their patients, but diagnostic decision-support tools help focus their aim and fine-tune their relationship with the patient. In sport, coaches aided by algorithms tailor training to each athlete’s unique capacities.
Making better personal financial decisions is no different. Blending behavioural psychology with quantitative finance theory employs the best of both human and algorithmic worlds. Humans concentrate on what they’re best at – empathy, values, conversation, navigating ambiguity, creating an environment for making comfortable and confident choices – while machines take on information-filtering, monitoring, and data-processing.
Our Oxford Risk suitability and behavioural client engagement tools guide both advisers and clients towards being the best versions of themselves as investors.
Important information
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.
