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Advisor News Financial firms focused on investors’ behavioural tendencies

‘Behavioural economics helps us understand why investors make irrational decisions. We’re starting to have different conversations about investor behaviour and how we can help,’ says Catherine Milum, head of wealth sales, retail markets, at Manulife Investment Management.

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As more financial services companies integrate behavioural economics into their business models, they’re encouraging and providing financial advisors with the necessary skills to focus on investor behaviour as a way to add value to their relationships with clients for the benefit of all parties.

Specifically, wealth-management firms are developing tools, resources and training material for advisors on how to talk to clients about the various psychological factors that impact decision-making when investing. Notable examples include loss aversion, the pain of losing money in the stock market has twice the negative impact as the pleasure of experiencing gains, which could spur someone to sell stocks in a downturn, and confirmation bias, which is when investors seek out or interpret information that supports their existing point of view, potentially ignoring information that could cause the value of their portfolios to drop.

In May, Manulife Investment Management announced a partnership with BEworks, a Toronto-based consulting firm focused on behavioural science, to help advisors guide their clients through market volatility through access to research, a relaunched microsite, whitepapers and other relevant resources.

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“Behavioural economics helps us understand why investors make irrational decisions,” says Catherine Milum, head of wealth sales, retail markets, at Manulife Investment Management. “We’re starting to have different conversations about investor behaviour and how we can help.”

Other firms delving deeper into this area include ATB Financial, which brought on behavioural finance expert Daniel Crosby to develop tools that help advisors discover what biases may be affecting their clients’ financial decisions, and TD Wealth, which also has a tool to help clients identify their wealth personalities and financial blind spots that impact financial decision-making. TD Wealth is also a founding partner of the Behavioural Economics in Action at Rotman (a.k.a. BEAR) centre at the University of Toronto’s Rotman School of Management, which conducts research in this field to help organizations design better products and services.

Identifying and managing investor behaviour has many benefits. Not only could it add value to the investor-advisor relationship, but it can also prevent investors from panic-selling during a market downturn, which could be negative for investors, advisors and their wealth-management firms.

Thus, some firms, such as Manulife Investment Management, are using behavioural economics principles proactively to try to prevent the type of panic-selling that occurred when the market corrected in the fourth quarter of 2018, particularly as some economists are predicting a recession in the near future.

“The timing was right to do a deeper diver into investment behaviour,” Ms. Milum says.

Manulife Investment Management’s new initiative is based on work with BEworks’ chief client officer, David Lewis, on what drives investor behaviour – with the aim of increasing client engagement. The firm’s relaunched microsite contains videos and other resources to help guide advisors in their conversations with clients; a cross-Canada roadshow to promote the initiative further is planned for the fall.

Advisors also are given tips on what to tell clients who may be susceptible to certain behaviours. For example, someone with loss aversion should be discouraged from checking her investment account regularly. One suggestion might be for the client to check the account as often as she goes to the dentist.

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The goal is to help advisors understand why people make certain investment decisions and how to counteract a move that might throw an investment plan off track, such as selling when the market is in the midst of a correction or buying a speculative stock without enough due diligence, Ms. Milum says. The focus is on advice, not just products, which “we think will have more positive outcomes for their client.”

ATB Financial’s wealth-management division, ATB Wealth, developed a program called “Money 20” with Mr. Crosby, who is also chief behavioural officer at Berwyn, Penn.-based asset-management firm Brinker Capital Inc. and author of books such The Laws of Wealth and The Behavioral Investor. Money 20 is a 20-question assessment that helps advisors identify behavioural biases that might cause clients to go off course from their financial plan.

“For us, it’s about asking better questions that allow us to have a richer conversation with clients,” says Chris Turchansky, ATB Wealth’s president.

The firm also has a coaching program to help advisors improve their interactions and engagement with clients through a behavioural finance lens.

“Even though we were trying to move the bar and focus on having good conversations with clients about goals and dreams, what we weren’t getting at were the underlying emotions that oftentimes derail someone’s investment or financial success,” Mr. Turchansky says. “The more we prepare and have better and deeper conversations with our clients about how they respond [through market volatility], the better off we are.”

TD Wealth has its own tool for advisors that helps clients understand their “blind spots” when it comes to investing, says Dave Kelly, the firm’s senior vice president, private wealth management.

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For example, someone who has a high degree of loss aversion or is focused on the short term would likely require and value more conversations and contact with an advisor than someone who doesn’t have these same behavioural tendencies.

TD Wealth’s tool leverages the commonly used “five-factor model of personality” assessment – which gauges a person’s openness, conscientiousness, extraversion, agreeableness and neuroticism (or OCEAN) – to determine an investor’s wealth personality.

The tool has “changed not only the conversation, but the relationships that [advisors] build with customers, which are at a deeper level than they were before,” Mr. Kelly says.

“The way I describe it to advisors is that customers have always intuitively known what we are just starting to figure out, the value is in the ongoing relationship and advice that [a client receives] and the counsel when life happens,” he adds. “It’s not actually anchored in the investment conversations.”

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