New tool helps clear blind spots
Technology uses behavioural finance to assist advisers in understanding clients’ psychological and emotional factors when making decisions
Emotions often override logic in the decision-making process, and financial decision-making is no exception.
To that end, TD Wealth Private Wealth Management recently launched technology that uses “behavioural finance” to help advisers understand clients’ financial blind spots.
Behavioural finance looks at how personality influences financial decisions. The field of study explores why people sometimes make biased, unpredictable or irrational financial choices.
The TD tool creates a wealth personality report for high-net-worth clients, using a model that identifies personality traits that can affect behaviour, according to the bank. It notes that the tool will be used to augment the current wealth advisory process. Client participation is optional
Jeet Dhillon, vice-president and senior portfolio manager for TD Private Wealth Management, explains that clients take a questionnaire and, based on their answers, a report is generated.
“Advisers use the wealth personality report to develop a customized investing strategy based on the personality traits and individual experiences of their clients.” JEET DHILLON TD PRIVATE WEALTH MANAGEMENT VICE PRESIDENT
“Advisers use the wealth personality report to develop a customized investing strategy based on the personality traits and individual experiences of their clients,” she says.
Behavioural finance is considered a pillar of behavioural economics, a broader field of study that explores the effects of psychological, social, cognitive, and emotional factors on economic decisions. The science behind behavioural economics — and more specifically behavioural finance — goes well beyond academic theory with many real world examples, Dhillon says.
While it’s a relatively new area of study, it is quickly gaining momentum among the academic and investment community, she says.
The tool is currently only available to high net worth clients, defined as those having $750,000 plus of investable assets.
“Is it promising? Sure,” says Rotman School of Management finance professor Eric Kirzner.
“It’s a legitimate field and a very interesting field because we all have biases in how we make financial decisions.” he says.
“I’m guessing they’re using it as a marketing tool.” Marketing professor Ken Wong of Queen’s University’s Smith School of Business considers TD’s new product “a bold response to the emerging services offered by fin-tech (financial technology) and robo-advisers.”
“It’s smart marketing when your product — advice — is intangible and therefore invisible, so they just added a tangible dimension,” he says.
For clients, it means a “more meaningful and personalized financial conversation and ongoing relationship with their adviser,” says Dave Kelly, senior vice-president, private wealth management, TD Wealth.
“With a deeper focus on discovery, our advisers can better identify and understand a client’s financial personality.”
Even the savviest investors can benefit from knowing their so-called wealth personality, he adds. Here are some of the most common traits that a TD adviser may uncover from the process: Framing effect. Responding to the same problems differently depending on how they are presented. For instance, you may view a 10 per cent loss on a $1 million portfolio differently than a $100,000 loss, even though those are the same thing. Familiarity. The tendency to over-invest in what you are familiar with. You may have a tendency to invest more heavily in companies or industries you know, particularly those in which you work, which could lead to an overconcentration in a specific sector. Sensitivity to noise. Recent information can tempt you to second-guess your established investment strategies. You may then make reactionary changes to your portfolio at inopportune times based on the latest news, which can negatively impact your portfolio. Loss Aversion. The tendency to feel losses more strongly than gains. If your portfolio lost 10 per cent in value, this might generate a stronger emotional response than a 10 per cent gain in value. Short-term focus. The tendency to value a reward that arrives sooner — and discount a reward that arrives later. You may have a hard time visualizing retirement income and expenses or have difficulty saving for a future goal. Overconfidence. You overestimate your own investment ability, so you engage in higher trading activity than the average person, which has been shown to lead to lower returns.
TD Wealth Private Wealth Management has launched technology that uses "behavioural finance" to help investors.