Wealth Strategies

Behavioural Finance’s Next Step To Going Mainstream

Charles Paikert, New York, 4 May 2022


Business benefits
And from a business viewpoint, the firms’ strong identification with behavioural finance has resulted in increased retention and referrals, Blau said. Friends of the firms’ clients have become clients themselves after selling their holdings and losing money during temporary market declines, according to Blau.

Because Fusion spends so much time on explaining behavioural finance concepts and prioritising temperament over intellect, “our clients can articulate how and why we helped them,” Blau said.

Indeed, since launching nine years ago with an emphasis on behavioural finance, Fusion now has nearly $1 billion in assets under management.

Overstated claims?
Claims that behavioural finance is a “unique” approach can be overstated at times, some wealth managers believe.

Emphasising a plan and sticking to it, for example, “is a common practice and advocated by a large part of the [wealth management community],” said Michael Goodman, president of New York-based Wealthstream Advisors.

On its website, Fusion claims that the wealth management industry “defines risk as volatility,” while in fact “the ultimate risk is in building a risk averse, or ‘safe’ strategy that decreases purchasing power.”

While that argument is not wrong, Goodman said, it fails to account for the risk that the client “cannot take the volatility or downside experience and will take action to destroy the long-term integrity of the plan. Clients with a healthy dose of these ‘safe’ assets more than likely will make it through significant downturns without bailing from the plan.”

Full commitment needed
Overall, however, behavioural finance concepts are being employed by eight out of 10 advisors, according a recent survey cited by Orion. To truly leverage the approach, RIAs should not use behavioural finance as “some kind of gimmick to attract more business,” Blau said.

Firms should “commit to it fully,” he stressed, and keep in mind that the “immutability of human nature,” or temperament, trumps intellect when it comes to investing.

Wealth managers who use the approach as part of their marketing strategy “need to be authentic,” Kurz agreed. The concept “fits very well in a planning-oriented relationship,” he said. “But it’s not easy. It takes repetition and practice to be good at it. And advisors have to recognise their own biases in the process.”

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