Wealth Strategies

Behavioural Finance’s Next Step To Going Mainstream

Charles Paikert New York 4 May 2022

Behavioural Finance’s Next Step To Going Mainstream

The investment approach shaped by ideas about behaviour and how humans actually conduct themselves is becoming more a part of the regular wealth sector conversation. Controversies and questions remain.

(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 Fusion Family Wealth, a Long Island, New York-based wealth manager, according to CEO Jonathan Blau.

Fusion has even taken out a copyright on what it calls “PsyFi,” the firm’s blend of “the principles of modern finance and the principles of behavioural finance.” The firm stresses behavioural finance as its “unique philosophy” on its website, and recently began a marketing and public relations campaign to promote its brand of “Behavioural Investment Counselling.”

This emphasis on behavioural finance is part of the “maturation process of the industry,” said Mike Kurz, director of programming for Investment & Wealth Institute. As the philosophy has become more widely accepted among wealth managers, it has reached the stage where firms are beginning to promote it, Kurz said.

Explanation needed
For the general public, however, it’s still early innings.

“The principles of behavioural finance are still relatively unknown to the average consumer,” said Susan Theder, chief marketing and experience officer for the marketing firm FMG Suite. “That’s why a firm like Fusion Family Wealth has to spend so much of their website’s real estate just explaining what behavioural finance even is before they can use it as a unique selling point.”

Nonetheless, Theder believes that the concept will catch on.

"Around 10 to 15 years ago some advisors began to market themselves as fiduciaries,” she noted. “Gradually every advisor was using that language and now it is no longer a differentiator. I can see the same thing eventually happening with behavioural finance.”

Steady inroads
In the meantime, behavioural finance continues to make steady inroads into wealth management, a trend this publication has regularly chronicled. Just this month, the giant software vendor Orion issued a white paper Don’t Call it a Fad: Behavioral Finance is the Future of Fintech, along with an on-demand webinar on behavioural finance’s role “in the future of our industry” by Dr Daniel Crosby, the firms’ chief behavioural officer.

The Certified Financial Planner Board of Standards has included behavioural finance concepts in its latest round of examinations and has just published a new book entitled The Psychology of Financial Planning. Investment & Wealth Institute is also incorporating behavioural finance concepts in its certification courses, Kurz said.

Behavioural finance’s emphasis on identifying goals and recognising irrational biases such as recency bias, loss aversion and confirmation bias “helps insulate clients from continually reacting to current events and short-term market movements,” said Fusion CEO Blau.

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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