Peter Brooks of Barclays Wealth discusses how entrepreneurs tend to approach financial decision-making, and therefore what wealth managers can do to help these types of clients in practice.

Date: Jun 2011

Tags: Behavioural finance, Bias, Entrepreneurs, Liquidity

• Entrepreneurs display an attitude that wealth is easy to generate, meaning they are likely to take higher risks – but they tend to stress more, and feel responsible for their decisions
• Entrepreneurs who are running their own businesses can buy themselves more time by having a professional manage their finances
• Advising entrepreneurial clients about how to best manage their portfolios is about convincing them of the value of investment management and passing off some of the control to buy time
• For those individuals who are very trading focused but feel they trade too much, splitting the portfolio into a discretionary part and a trading part can be effective

When it comes to advising entrepreneurial clients, a Barclays Wealth Insights Report, entitled “Risk and Rules: The Role of Control in Financial Decision Making”, showed that these clients don’t feel the same responsibility for their wealth as individuals who inherited it, said Peter Brooks in an interview.

Entrepreneurs also displayed an attitude that wealth is easy to generate, he added, meaning they are likely to take higher risks.

However, this means they perhaps also stress more, and feel responsible for that decision making, said Brooks.

The findings also showed that the willingness of respondents to delegate control to somebody else is much lower in Asia than for the global average. In Singapore, for example, around 7% of respondents said they are willing to delegate the control of their finances to somebody else.

Yet for entrepreneurs who are running their own businesses, Brooks said one of the best things they can do is to buy themselves more time by having a professional manage their finances.

Comparing approaches to personal and business assets

Using the Barclays Wealth financial personality assessment as a guide, Brooks said entrepreneurs are typically very high risk tolerance, as would be expected, so are risk-takers in every aspect of their business. But they control risks, he added, which suggests they understand what the risks are and therefore controlling risk and taking risk is a trade they are willing to accept.

It’s also not unusual to find they particularly low composure, he added, so they stress about a lot of financial-related decisions they make and they feel very responsible for those decisions.

The assessment also shows that typically there is not much cross-over in terms of risk-taking into the financial market, said Brooks. So if the entrepreneurial activity is completely outside of the financial markets, there is no reason to suggest the individual will be comfortable buying equities or bonds.

Entrepreneurs who sell their business, meanwhile, are often not sure what to do with their liquidity, he added. They know they want to get invested, but aren’t sure exactly how to do so. It is therefore important to help get them over the hurdle to get invested.

Advising entrepreneurial clients

According to Brooks, in advising entrepreneurial clients about how to best manage their portfolios, it is about convincing them about the value of investment management and passing off some of the control in order to buy time.

For those individuals who are very trading focused but feel they trade too much, perhaps splitting the portfolio into two parts might be effective, he explained. One part can be discretionary, managed by investment professionals, with second part more trading oriented.

This satellite-type approach can enable the relationship manager and the client to take more active positions in the market and therefore develop that part of the relationship based on frequent activity and one that satisfies the client’s need and desire to act tactically.