Why behavioural profiling is key in advice

New research has suggested that wealth managers, including financial advisers, need better systems and tools to support clients, particularly in the light of recent events such as the financial impacts of COVID-19, rising inflation, and high levels of volatility.

Findings from Oxford Risk have revealed that over four-fifths (82 per cent) of wealth managers consider helping clients manage their emotions a major part of their role.

Oxford Risk’s study of Australian wealth managers, who collectively manage assets of around $231.9 billion, found that 76 per cent said their clients regularly make investment decisions based on their emotions.

This, as reported by three-quarters (72 per cent) of respondents, is a major cost for investors.

Namely, more than half (57 per cent) of wealth managers believe that the average investor loses 1 per cent or more of their investable wealth each year due to emotional decision making.

In a chat with ifa, principal of Moran Partners Financial Planning and founder of iFactFind, Dr Paul Moran, said Australian advisers are becoming much more aware of issues around investor behaviour, and perhaps more importantly those directly linked to financial decision making.

He explained that for an investor, simply recognising biases doesn’t help them escape the temptations. But that’s where an adviser’s expertise comes in.

“One of the better reasons to employ a financial adviser is that they are one step removed from the decision-making process,” Dr Moran explained.

“Good financial advisers and investors will have developed a methodology for decision making that, if followed, can overcome the worst of the biases.”

The Oxford research also found that while 78 per cent of wealth managers said they have a very good understanding of their clients’ risk tolerance, as many as 68 per cent admitted to sometimes being surprised by the decisions their clients make.

As such, Dr Moran urged caution, noting that advisers need to ensure they’re not taking a more superficial approach to biases.

“With well over 200 different biases identified, and some more than a little questionable, focusing on the dominant biases or risk aversion, anchoring and adjustment, recency, overconfidence, confirmation, and hindsight biases might be a good start,” he tipped.

Similarly, in conversation with ifa, researcher of financial psychology at Kitces, Meghaan Lurtz, emphasised that “advisers are human”, hence practice is key.

“They totally have the skills to help investors make decisions, navigating beliefs and biases,” she said.

“However, also because advisers are human, it helps to have some practice. More now than ever before, advisers have access to training and resources dedicated to the human side of financial advice,” Ms Lurtz added.

Ultimately, Dr Moran opined that the greatest tool an adviser can deploy is their ability to “observe and listen to clients”.

“Exploring past financial decisions is a great way to help understand some of the biases exhibited by clients,” he concluded.