Humans Under Management: Making Behavioural Finance Relevant

I was honoured to be invited by my good friend and leading financial planner Andy Hart, to speak at last week’s inaugural Humans Under Management conference. The aim of the new annual event is to promote, highlight and build on the work that advisers are doing to introduce and develop behavioural finance into their own planning practices. This is an area we’re passionate about at First Wealth – we’ve just published a ten-part series exploring the topic and considering how we can start to use its insights to build strong relationships and achieve great results for our clients.

Cutting through the noise

There’s a heck of a lot of noise around behavioural finance at the moment. It’s been familiar to those of us in the financial advice profession for many years but recently it’s started tipping over into the wider public consciousness. Only a couple of months back, one of the founding fathers of the discipline, Richard Thaler, won the Nobel Prize for Economics.

The key message behind my talk at Humans Under Management was that if we want to successfully engage with the important lessons of behavioural finance, it’s vitally important that we make it relevant and interesting to our clients. I’ll use an example from my own life to show how it became relevant to me.

On the 25th of January 2015 our first child, Lux, was born. It was by far the happiest day of our lives. But roll forward two months from then and my fiancé Petra was being diagnosed with early stage triple negative breast cancer. It was a massive shock to both of us, and we quite literally went into survival mode, boiling everything in our lives down to what we needed to do physically, emotionally and financially to survive as a family. After going through chemotherapy, a double mastectomy and sepsis, Petra is now recovering amazingly well. It was an incredibly tough time, but we count ourselves very lucky.

We use phrases like ‘you only live once’, ‘life is not a rehearsal’ and ‘live for today’ every day in our work with clients, but it’s only when life delivers a sledgehammer blow to you like this that these phrases really create massive emotional meaning. We now had a new frame through which we were viewing the world. We’d talked about moving out of London for years, but there had always been a reason not to. Thinking back, I was displaying a whole host of behavioural finance biases. I’ve listed them below and linked to the explanations of each bias if you want to read up further:

• What if the more painful commute outweighed the benefits of living outside of London (a weird sense of loss aversion)
• No one was moving due to the EU referendum result – perhaps it was easier to do the same as everyone else (herding)
• Maybe we should stay put as there’s just too much to think about (status quo or conservatism bias)
• The previous summer the asking price for the house was higher than it is now, so I don’t want to miss out (anchoring)
• House prices have been going up and that would just continue forever in London, wouldn’t it? (The hot hand effect)

All these thoughts were parading through my head until Petra was able to cut through the noise, and ultimately ask the right question – “Anthony, do we want to live in London anymore?”

The simple answer was no, but the beautiful simplicity of this question enabled me to see what really mattered to us! We immediately made the decision to move to the South Coast. We went through our own life-changing financial planning process and we haven’t looked back.

The experience of this has helped me in four ways. One, it has allowed me to look at life with relevant framing. Everything I now do is framed with the emotional and physical suffering Petra endured, and her unwaveringly positive and ‘never-feel-sorry-for-herself’ attitude. A true heroic outlook from a truly remarkable woman. It’s helped me to put a lot of things in perspective. Big decisions to make in the business? No problem. Public speaking? No drama. Train delayed by ten minutes? Absolutely awesome!

Two, it reinforced the incredible power of financial planning done correctly. Done well, financial planning can change people’s lives, and that is indeed the First Wealth ‘why’! It’s the reason we exist.

Three, I also experienced firsthand how our natural human instincts can stop us from progressing in life. Our role as financial planners is to empower our clients to make great decisions, through education and partnership, but also to stop them from making emotionally-driven bad decisions! Financial counselling, if you like.

Four, it’s allowed me to think bigger, and not be frightened about setting big goals. Our thinking in First Wealth has become more ambitious. In addition to our core financial planning work, we also want to make a really positive impact on the UK financial planning profession. We believe that great financial planning should be available for everyone. We want to help with financial education in schools and we also want to look to the future by introducing and training the financial planners of tomorrow. Clearly, we have a lot of work to do, but we’re excited about the opportunity!

The science behind the feelings

In order to deliver life-changing financial planning we need to understand and promote how it can have a real effect on clients’ lives. A great financial plan means nothing if you don’t stick to it! It’s down to us to design client experiences that help our clients to make consistently great decisions (and avoid making costly mistakes). To understand this, we need to look to the neuroscience behind it.

There are four major chemicals in the brain that influence how we feel: dopamine – what we normally think of as the happiness drug; oxytocin – which is released through closeness or bonding with another person and helps build trust; serotonin – which controls whether your general mood is good or bad; and endorphins – which are for masking pain or discomfort and help you ‘power through’.

By designing regular experiences that activate these chemicals, we can increase client happiness and build trust with a view to strengthening and nourishing a healthy relationship.

One of my inspirations is US financial adviser, Mitch Anthony. Mitch suggests that successful long-term relationships succeed when we concentrate on how we make our clients feel.

Mitch put together a list of six key concepts that financial planners and clients should focus on. I’ve listed them below with my views on how we can implement them in practice:

Organisation – We will help bring order to our client’s financial life, both physically with paperwork and mentally by helping you order your thoughts and priorities. This process creates peace of mind.

Accountability – The best plans mean nothing if we don’t follow them through. We set and then help clients deliver on their priorities by holding regular reviews and updates. The sense of achievement through realising goals is inspirational and infectious.

Objectivity – We help our clients understand the emotional biases that affect us all, and the impact they have on the decision-making progress. It is vital that we tell our clients the truth about money – ‘tell clients what they need to hear, rather than what they want to hear’.

Proactivity – It’s important to understand what’s going on in clients’ lives and to look at how those transitions will affect them and their need for planning. Proactivity also relates to relevant communication and timely nudges to educate and aid great decision-making.

Education – For me, education is the most important part of the whole process. What information and knowledge is needed to aid our clients with both massive and small decisions? Knowledge varies significantly between clients, so the detail and presentation of the information is important. Again, it needs to be both interesting and engaging, always remembering that in many cases the best advice is often to do nothing.

Partnership – We want to work together with clients to help them achieve the best life possible. If there’s one thing to remember about behavioural finance it’s that we’re all susceptible – advisers as well as clients. A good adviser understands the situation. We’re not judging clients, we’re partnering with them to work around these biases for the common good.

There are 188 known biases in behavioural finance and my view is that if we combine some of the thoughts around these six concepts and what we know about emotions and neuroscience we can make a real difference in the ways we serve our clients. My takeaway is that it’s not for us to explore the reasons why these behavioural biases exist – we’ll leave that to the psychologists. Our role is simply to help clients understand what the biases are, and then work to make excellent investment decisions through education. This, I believe, is how we make behavioural finance relevant to the lives of our clients.

If you would like some help in planning your ideal financial lifestyle, please get in touch.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.