The global professional standards body for financial and investment services says understanding the quirks of human behaviour is an increasingly important subject for training wealth managers.

Wealth managers must take behavioural finance seriously as a means of finding, serving and keeping clients. Advisors need to get educated on the discipline, the CFA Institute, the global professional accreditation body, argues.

For advisors who want to understand clients’ emotions and ideas better – and make sure that they provide suitable services that pass regulatory smell tests – a grounding in the subject is important, senior CFA figures told this publication recently. This news service recently spoke with Barbara Pettit, head, Curriculum and Learning Experience, and Bob Dannhauser, head, Global Private Wealth Management, CFA Institute.

“There is an appreciation among investors about how the client discovery process works and how a client’s decisions in the past might be a predictor of future behaviour,” Dannhauser said. Behaviourial finance and related ideas can lead to a more “disciplined and systematic way to have conversations”, he said.

“We have come to recognise that understanding clients is a very textured, multi-dimensional exercise. That speaks to the idea that people are taking it [behavioural finance] more seriously rather than just winging it in a way to try and talk to a client,” he continued. 

His colleague said that the CFA proved how important the subject is at one of its recent conferences in London. “There’s been appetite for members to get informed about behavioural finance in terms of their professional development. It used to be an emerging topic but now it is embedded in decision making,” she said.

The CFA Institute spoke to this news service a few days before it announced the release of the 2020 edition of the CFA Institute Global Investment Performance Standards, taking effect on 1 January 2020. The standards are principles guiding investment managers and asset owners on the ethics of how to calculate and present investment results fairly. (Delivering results in a clear, easy-to-grasp way is, itself, a sort of behavioural issue - people can be suspicious when they think they are being fed with jargon and mind-boggling reams of figures.)

When stock markets were hit last year, for example, or when the forex market was roiled by Switzerland’s sudden decision in 2014 to scrap the Swiss franc/euro peg, it brings home how even clients who claim that they are fine with risk can suddenly find that they actually are more cautious. A long bull market in stocks post-2008 (with some interruptions) and the rise of passive investing might have bred complacency. And not just among clients, but advisors too.

A number of business schools and universities, for example, such as the Cambridge Judge Business School in the UK, Columbia University and Massachusetts Institute of Technology in the US, teach the subject. 

In the classroom and in the office
The CFA’s courses for financial professionals include behavioural finance ideas. 

“The curriculum is designed to put practitioners into the context of decision-making. There is a list of different behavioural biases and how advisors can identify their clients’ behavioural biases and how to address them,” Pettit said. One aspect, she said, is that the CFA Program curriculum looks at case studies where the insights of behavioural finance might make a difference to outcomes.

One of the reasons why the subject has become more “mainstream” – as previously noted here – is that modern technology, such as the ability to sift vast troves of data – has it made it easier to combine insights that are quite old with modern finance. For example, artificial intelligence tools can be used to simulate market environments and test how a person might react more realistically than old pen and paper. 

“The industry has access to a lot more tools that help them to be proactive and lets them walk through different scenarios, whether they are good or bad outcomes,” Dannhauser said.

“Wealth management practitioners can run through different market simulations……it has shifted the focus of a lot of client/advisor conversations to something that is a lot more forward-looking,” he continued. 

A number of books have been published in recent years on behavioural finance and economics, with some more academic than others. Examples include Freakonomics, by Steven D Levitt and Stephen J Dubner; Predictably Irrational, by Dan Ariely; Nudge: Improving Decisions About Health, Wealth and Happiness, by Richard Thaler and Cass Sunstein; and What Investors Really Want, by Meir Statman.

To see a related item on the graduate/post-graduate and MBA programmes pitched at wealth managers around the world, see here.