Greg B. Davies of Barclays Wealth reveals the value and application of the firm’s financial personality assessment tool, and explains how behavioural finance can be used practically.
Date: Apr 2012
The dimensions represent fundamental aspects of risk attitude, he explained, ranging from long-term rational risk tolerance, to short-term composure and the degree of emotional involvement in the short term, to the degree of market engagement, which is the degree to which clients find it easy to move out of cash in the first place.
Such fundamental traits tend to be universal, said Davies. And although there might be different behaviours in Asia compared with other parts of the world, the fundamental psychological elements to be aware of are the same.
For Barclays, he said it is more important to understand each client as an individual than to generalise on criteria such as where they live, their gender, or their age, for instance.
The financial personality assessment therefore enables the firm to construct portfolios for individual clients which gives them emotional comfort as cheaply and efficiently as possible.
An evolving tool
There have been some changes to the financial personality assessment tool since it was launched five years ago, said Davies. These have been based on the new data the firm has collected and analysed, from results of 15,000 clients and prospects taking the financial personality assessment.
So some of the questions have been tweaked to enhance understandability, he explained, to ensure that anyone can answer them – regardless of financial knowledge, degree of numeracy, or language.
Benefits to clients
According to Davies, it is inherently difficult to demonstrate benefits of this approach to any individual client, because the tool doesn’t come up with a theoretically perfect portfolio. Instead, it suggests the portfolio that is most likely to achieve the best result.
In fact, he explained, this might mean sacrificing a bit of theoretical perfection in order to purchase the emotional comfort for the client.
As a result, the aim is to help the client to perform better than they would have otherwise done.
For clients who have been very engaged in the investment philosophy process and the financial personality assessment, Davies said there is evidence that they have more stable portfolios as a result, and are less likely to be making frequent changes to their portfolio in turbulent times.
In addition, Davies said the bank now has greater assets under management now from these clients compared with those who have been less engaged with the philosophy and assessment process. There is also evidence of greater levels of satisfaction with the firm’s advice, products and tailoring of solutions, he added.
Behavioural finance as a fad?
The financial crisis has boosted the role of behavioural finance, said Davies, because when things started going wrong and people started losing money, and in turn get stressed and scared, they start to pay more attention to decision-making.
The popularisation of behavioural finance as a concept has now, therefore, largely been done, he explained. So the industry, in his view, should be using insights into behavioural finance to make practical changes to portfolios.
For example, he said, this might mean giving different portfolios to two different clients with different personalities, even if they have the same risk tolerance, because on the one hand one client might have a very high need for short-term emotional comfort, and on the other might be a client who can easily ride out the ups and downs. In response to this, the portfolio will be structured completely differently.