Peter Brooks of Barclays Wealth looks at the desire for more financial discipline across Asia, and explains what the key findings from a recent global survey highlight about behavioural biases of wealthy individuals.

Date: Jun 2011

Tags: Behavioural finance, Bias, Risk tolerance

• While it is easy to think of HNW individuals as being well-advised, nearly half of the 2,000 people surveyed said they needed more financial discipline
• The findings also showed that people are three-times more likely to trade too much if they think they have to trade often to do well in markets – which will lead to lower returns and a cycle of dissatisfaction
• Asian HNW individuals overall not only showed patterns of having a slightly higher risk tolerance than the global average, but also of a tendency to get more stressed

The recent Barclays Wealth Insights Report, entitled “Risk and Rules: The Role of Control in Financial Decision Making”, saw a desire for financial discipline, said Peter Brooks in an interview.

While it is easy to think of high net worth (HNW) individuals as being well-advised, with access to all the tools they need to control their money, nearly half of the 2,000 people surveyed said they needed more financial discipline, he explained.

The survey also looked at a number of strategies investors have to help them be disciplined, added Brooks, such as mandatory cooling-off periods, delegating control to others, or self-imposed cooling-off periods to allow for reflection. This provided insight into how effective different individuals think these strategies are.

In relation to the desire for more financial discipline, Brooks said a key finding from the report was a “trading paradox”.

This came from a combination of two questions in the survey: first, whether individuals think they need to trade frequently in the market to do well; and secondly, whether people think they trade too much.

Rather than the answers to these two questions being in conflict, the findings showed that people are three-times more likely to trade too much if they think they have to trade often to do well in markets. This will lead to lower returns, said Brooks, and a cycle of dissatisfaction.

For example, a survey the bank commissioned in the UK unit trust industry in 2010 showed that people’s trading behaviour in and out of the product was costing them around 20 basis points per year in terms of performance. So over the course of 10 years, this leads to a large under-performance.

Asian investor attitudes

In total, the report surveyed around 500 individuals in Asia-Pacific, said Brooks, with around 100 from each of Hong Kong, Singapore and India.

Asian HNW individuals overall not only showed patterns of having a slightly higher risk tolerance than the global average, but also of a tendency to get more stressed.

In Hong Kong, in particular, he said the trading paradox was more apparent, with 45% of individuals feeling they need to trade frequently to do well, and over 55% of individuals thinking that they trade too much. The numbers were much lower in Singapore.

Asset class trends

In terms of asset classes which HNW individuals in Asia like to buy, Brooks said Hong Kong investors have a preference for cash and real estate. Yet they also perceive these as the two least-risky asset classes.

In Singapore, by contrast, the survey showed a more diverse approach to investing.

Preventing bad things from happening

According to Brooks, when looking at the extent to which investors in Asia are focused on preventing bad things from happening to their portfolios, there was a slight conflict.

While there is higher risk tolerance, over 60% of respondents said they mainly try to stop bad things from happening – yet these things don’t gel, he explained.