A business operating in the fast-changing field of behavioural finance talks to this publication about its rapid growth, what the future holds, and why markets, technology and the needs of wealthy clients drive this area forward.

The subject of behavioural finance has been gaining ground, not just because Nobel prizes have been showered on luminaries in the field such as Richard Thaler, Daniel Kahneman and Amos Tversky, but because volatile markets have underscored the presumed insights of this field. 

The discipline harnesses what is known about human psychology to understand that the decisions people make with savings, investments and spending are not as coolly rational and objective as one might think. Humans do not, so the argument goes, start off in life with a mental “blank slate” but instead carry habits and tendencies that are products of millions of years of human evolution. (Some of these notions can be controversial – the field known as evolutionary psychology, drawing on ideas from Darwin and others, can carry political implications such as male/female differences.)

BF practitioners generally seem to argue that the more humans understand how they think, and how they can be biased, paradoxically, the more rational their choices could be. For example, a person who knows that they have a short temper in certain situations might be more careful about avoiding such situations; a person with an addictive personality might take care to avoid getting into environments where temptations exist, and so on.

A business operating in the space is UK-based Oxford Risk. Earlier in November it reported that its client base of wealth managers and other investment management companies has nearly doubled over the past 12 months. It now serves more than 100 clients in the UK, Europe, South Africa, Asia, and Australia, who collectively have more than $1 trillion in assets under management. In the past, this news service has interviewed Greg Davies, PhD, head of behavioural finance, at Oxford Risk, before (see here). 

This publication interviewed Oxford Risk about its growth and what the future holds.

In what ways can you measure how appetite for behavioural finance insights has grown over the past one to two years? Are you tracking enquiries, flow of new clients, other metrics? 
We track the incoming client requests formally and can establish clear percentage increases that way. Also, on a more anecdotal basis, we can share what we are seeing in banks setting up their own behavioural units and the conversations we are having with them. 

We have seen 150 per cent growth of incoming requests from the full gamut of prospects from IFAs to multinational universal banks. Our number of clients has doubled in the last 12 months and we expect that growth rate to accelerate further. 

In what ways has the pandemic fuelled interest?  
The pandemic has had several effects for us. 

The immediate effect was the need to have a simple way of understanding how changes in an investor's financial circumstances affected their overall financial capacity to take risk. The pandemic really exposed the shortcomings of existing suitability systems, which are typically a) very front loaded, with the bulk of client profiling and solution matching done at the beginning of the client relationship, with only light and infrequent updates thereafter through annual reviews (at best); b) very human heavy, and therefore difficult to do rapidly, efficiently, and at scale; and c) very static, where the answer does not respond dynamically or sensitively to changes in client financial circumstances.

All this meant that the industry really struggled to update investment advice at scale at a time when globally all investors' financial circumstances and plans changed substantially and simultaneously. This has massively fuelled interest for technology solutions to enable more efficient and dynamic suitability. 

Secondly, the pandemic has hugely accelerated digital adoption in wealth management and financial advice. This part of the financial services industry has always been somewhat more reluctant to fully embrace digital tools than other areas, and the pandemic has prompted a catch up. 

Thirdly, as investors’ digital interaction has soared, our clients have looked to us for help in understanding what engagement the investor needs to invest and crucially stay invested. Crises always focus attention on the importance of emotion and behavioural aspects in decision-making, and this pandemic has demonstrated the need to be able to deliver hyper-personalised client engagement digitally and at scale to help investors through emotionally stressful times. 

Lastly, one of the medium-term effects of the pandemic is the increase in cash which investors are holding, and that in turn is driving a lot of interest in our cash deployment tools. These use hyper-personalised behavioural messaging and tools to encourage savers who are reluctant to deploy their surplus cash, something that is immensely costly both for the industry and for savers themselves in the long-run. This reluctance is largely behavioural: it is emotionally uncomfortable in the short-term to move money from somewhere “safe” (savings) to “risky” (investments), leading to reckless conservatism in the long-term. Our tools provide different mechanisms to overcome this reluctance, based on the unique financial personality of each investor. 

What kind of specific help are clients looking for? 
Clients still come to Oxford Risk for the most robust understanding of an investor’s suitability. The fastest growth area for us is in hyper-personalised engagement with investors at scale – in this regard the specific issue of cash deployment, as mentioned above, has been particularly in demand; but so is engagement to help investors manage their emotional states through volatile investment journeys. Finally, ESG profiling, how to include it in an investors' profile, and how to use it to drive “ESG Suitability” is creating a great deal of incoming enquiries from potential clients. 

What tools and insights that Oxford provides are you seeing particular interest in? Where do you think more work by your firm is needed? 
As mentioned above, ESG profiling, cash deployment, and other digital engagement tools. Our purpose is to improve investor outcomes by recognising that investors aren’t robots, but people subject to emotions. So really our focus remains the same: how can one best understand investors, and then how do we take these insights and encode them in software that financial institutions can easily deploy on behalf of their clients, at scale. Our core offering is our Investor Compass and everything we learn we make available in the tool in due course. 

Are you taking on more staff, adding more resources, other?  
We have and will be adding more. In the last eight months we have added technologists, data scientists, sales (including our first team member in Australia) and finance. It is likely that we will double our staff again in 2022. 

Geographically, where are your clients and are there examples worth drawing attention to? 
The UK remains our home and our most important market. We do see that many of the rules adopted by the UK regulators are now being enacted in countries such as Australia, Canada and across Europe with a corresponding uptick in interest in our solutions. In Asia we see a great deal of interest in digital solutions reflecting the innovations banks are making in this area.

Finally, many of our clients operate across multiple jurisdictions and correspondingly need a solution that can meet the need of multiple regulators, which ours does.