Dubai: Wealth management firms are now chanting the behavioural finance mantra as they evolve to meet increased demands from high net-worth investors, spooked by a sharp erosion of their wealth in 2008.
The global economic crisis "hit investors at every level of wealth and impacted them on personal and emotional level", said Amir Sadr, Middle East Head at Merrill Lynch Wealth Management, while presenting the World Wealth Report last week.
"Many lost incomes, saw their retirement savings shrink or tried to open new businesses or take out loans, but were unable to find cash."
While 59 per cent of high net-worth individuals (HNWIs) indicated they had regained trust in their adviser over the past year and 56 per cent had regained trust in their wealth management firm, a massive 71 per cent have yet to regain trust in the regulatory bodies that are supposed to monitor the markets and protect investors, the wealth report said.
To counter this distrust, wealth management firms and advisers will be further challenged to overcome investor hesitation and caution as they encourage the kind of investing that is needed to recoup losses, it said.
"Behavioural-driven investing can serve as a differentiator among firms and advisers," said Sadr. "Many firms are already beginning to embrace behavioural factors as part of HNWI investing strategies and the holistic advice they provide their clients.
"Long-term, however, firms and advisers understand that adapting a sustainable or profitable behavioural finance strategy means consistently capturing information that can drive deeper, goal-oriented conversations with clients consistently and efficiently."
Clients are demanding fundamental changes in how they are served, and are rewarding firms that can demonstrate a sharper understanding of their emotional and intellectual needs and objectives.
Behavioural finance research has long shown that psychology and emotion prompt investors to behave in ways that are inconsistent with what is deemed rational in modern portfolio theory.
"With the crisis having such an impact on investors' wealth and with investor confidence still tenuous, it isn't surprising that many investors are being driven by emotional factors in addition to intellectual information when making investment decisions," said Yasar Yilmaz, regional head of sales, Middle East, Capgemini.
"In response, wealth management firms and advisers are already adjusting their approaches to engage in greater dialogue that addresses their clients' ongoing concerns."
To effectively meet the needs of HNWI investors today, wealth management firms and advisers are looking to incorporate emotional factors into stronger portfolio management and risk capabilities.
Yilmaz identifies three specific behaviour patterns that have emerged among the world's rich "they are more cautious, they invest more conservatively, and they are more engaged in their financial affairs after the crisis".
He added: "Clients are demanding more in-depth scenario analysis to understand the implications of current and proposed portfolio changes. They are questioning the long-term health of the markets, until regulatory bodies put more controls in place."
Being aware
At the same time, however, millionaires are increasingly relying more on educating themselves and becoming more aware of investments, markets, risks, portfolio details etc. "They make the effort to re-validate the advice they receive from their advisers, using other sources like peers and their own research capabilities. They are also more engaged in better understanding the fine print associated with products, disclosure statements, and their overall risk," Yilmaz said.
Adapting to these new market realities and changing client behaviours will require different degrees of transformation and change that can potentially affect all aspects of the operating model of wealth management firms including products, processes and platforms, and service models.
The specific adaptations each firm ultimately makes will depend on the firm, its size, focus, specialisation and its vision for its future, as well as its desire and ability to adapt and lead, the report said.
"It will be essential to deliver the right level of high-touch advice and market-relevant product and service innovations to meet the needs of all clients in a scalable way," it said.