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Behavioural Finance’s Next Step To Going Mainstream

Charles Paikert

4 May 2022

(An earlier version of this article ran yesterday on Family Wealth Report, sister news service to this one. Because the themes are global by nature, we hope readers around the world find the insights relevant.)

Behavioural finance, the increasingly popular approach to investing which applies psychological insights into understanding why people make certain financial choices, is now being used as a marketing and branding strategy.

For example, behavioural finance is the “dominant differentiator” in the philosophy and marketing strategy of .

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.”