This publication talks to one of the most prominent wealth management experts on the field of behavioral finance, a field now winning plaudits from the Nobel Prize Committee, and major holders of assets.

A few days ago WealthBriefing began by explaining some of the terms behind behavioural finance and why it might be in wealth managers’ interests to become familiar with its potential. In this second outing, we talk to Greg Davies, who has been at the forefront of developing suitability tools based on how money affects people's behaviour for the best part of two decades. As chief behavioural scientist at Barclays between 2006 and 2016, Davies said there was an enormous 10-year effort at the bank to plug behavioural finance into the organisation. He was in a unique position there to witness few more primal events than the 2008 crash for showing how markets and emotions are intrinsically linked. (WealthBriefing will also be reporting on how that pioneering work has since continued at Barclays.)

After Barclays, Davies joined investor risk profiling company Oxford Risk. When we spoke to him in June, the firm was about to trial a service 18 months into development for a large wealth manager in Singapore (he wouldn’t be drawn into naming) using algorithms, which his company had designed, and was about to integrate directly into the wealth manager's CRM system.

If this still sounded more like science fiction than reality, we began by asking Davies what kind of behavioural building blocks go into creating such an algorithm and where we were on the cusp of all this insight?

Where to begin
“If you go on to Wikipedia and look at behavioural finance and at psychological bias, there are 180 of them - none of them are rocket science, and many of them are associated to risk. The problem isn’t that any one of those things is complex; it is that together there are too many moving parts for most individuals or corporations to keep track of.“

In Davies’ case, his firm does keep track to create a person’s financial personality based on their current financial circumstance and ability to take risk. To do this, “We look at what they have on their balance sheet, what they want from the future, their cash flow expenditure, their retirement dates and goals, and we bring all of these into a single model. We can then say: "OK, we know your willingness to take risk, but we also have a tool that can quantitatively and dynamically assess your ability to take risk.”

At Barclays, Davies developed tests that measured six different dimensions of someone’s financial personality. At Oxford Risk, he said that number is up to 12.

While some of these insights may have been on human minds since the Ancient Greeks, it is only now through technology and harvesting tangible behavioural information that companies can put these data points together and act on them in potentially groundbreaking ways.

Behaviour and technology combine
In one scenario, Davies envisions a wealth manager arriving on a Monday morning to a screen lit up with actions delivered by an algorithm that has spent the weekend looking at each client’s portfolio across the entire firm for the last week.

He suggests a notification might follow on how close a client is to the MiFiD 10 per cent compliance rule nudging a manager to send a message telling that client not to panic. Davies said a client’s risk tolerance score, risk capacity, composure score, impulsivity score - any of those factors could ping up in front of an advisor, and instead of them just saying, “‘Oh wow, that’s interesting’, you can start turning them into a guidance system for advice."

He argues that such a system makes advisors more efficient, organisations more cost effective, and clients more satisfied because overall the system is delivering a better cost/income ratio. “We are getting to the point now where we can take readings of someone’s behavioural proclivities and start to plug it into technology.”

Where such tools may offer wealth managers added benefit is during the onboarding process. If a client senses early on in a conversation that the bank is getting a good feel for them and communicating this quickly and well, it can make the process run more smoothly. If a client feels that the firm is on their wavelength, they are also less likely to panic and defect during those early pain points.

Winning over the next gen
Another concern is how prepared wealth managers are to capitalise on the promised tsunami of generational wealth transfer and being in tune with the next generation of Millennials and other age groups entering the frame with money to invest.

Couple this readiness with overall margin worries and client retention, is Davies seeing wealth managers becoming more receptive to suitability-based tools as a way to win out?

“I think like everything there’s a spread. There is a portion of the industry that is beating a path to our door. They are the ones who are thinking in these terms and how they are using technology and re-platforming digitally, and there is a massive and growing acceptance of that.

“That said, wealth management as an industry is often relatively traditional so there is still a large swathe of the industry that hasn’t yet accepted or in some cases even thought about the case that these tools can help.”  

He believes part of that is simply down to the fact that they are new. “At Barclays, we built these things but we mostly used them by sitting bankers and advisors in a room and telling them what to do. We didn’t then have the capabilities to build anything into the CRM system as a suitability process. So I think for many there is still a bit of the, ‘Yes I can see there is an upside, but show me where and how it works first.'”

A way to differentiate
At a time when many aspects of wealth management have become commoditised and more homogenous in the industrialisation of the wealth experience, there is a case for arguing that new tools and approaches are a way for firms to differentiate the client experience and make client reporting stand out. How much of this is Davies seeing in the field?

"We see a very clear distinction between clients in the UK and clients outside the UK. In the UK, the route in is very often people are looking for more sophisticated solutions to regulatory and compliance issues so we start from the point of, ‘We can make your client and suitability system more behaviourally grounded and on top of that you get a bonus of better client engagement.’”

Davies said those making recommendations appreciate that it as a client engagement tool but sell it as a compliance tool because that’s the best case they can make to the firm at this point. "But in places like Singapore, it really is all about ‘How do I use technology to better engage with my clients?’” he said.

After 10 years at Barclays developing suitability tools and generally pushing behavioural science more into mainstream financial services, does Davies feel it has finally broken out of its academic constraints and is being seen as something beyond a concept for the majority of wealth managers?

The comfort factor
"When you are in the people business, data stuff just feels a bit uncomfortable to relationship managers. Yes it has been conceptual; we pushed it quite far at Barclays, but it took us a long time to get there.” When the team first applied it at Barclays in 2006 to 2011, “We spent as much time convincing people internally as we did getting anything done,” he said. “There was a huge sales job to be done there.” He concedes that it has been a long period of maturation. "I would say we have gone beyond conceptual but we are still in the relative early foothills days.”

Analysing why the discipline hasn’t moved further faster, Davies reflects: "I think a lot of it is the human nature of the wealth business coupled with the prospect of changing any legacy systems. Also, because traditionally relationship managers and financial advisors are often the gateway to clients, there is resistance to anything that might disrupt that relationship, and it is inherently the conservative side of the financial services industry.”