Some market practitioners argue that behavioural coaching is probably the area where the added value of a professional wealth manager is most pronounced. By Kees Stoute
Daniel Kahneman and Amos Tversky are considered to be the founding fathers of behavioural finance.
Already in the 1970s they convincingly made the point that it’s only human mental confusion that attributes random movements in the market to some kind of underlying purpose. To put it simply, they showed us that people don’t act rationally.
Their contributions to the field of economics led Kahneman to become the first-ever psychologist to win a Nobel Prize in Economics. That is both unusual and remarkable.
Since then, many cognitive biases have been researched, such as anchoring, mental accounting, gambler’s fallacy, prospect theory, familiarity bias, etc.
All these concepts refer to different biases, but all share one element: they confirm the point that people don’t take decisions the way they think they take decisions. Or, to put it differently: people are irrational.
For the professional wealth manager, the insights derived from behavioural finance are essential in helping clients to limit the damage of their actions, which tend to be the result of irrational investor behaviour.
Encouraging the right behaviour
Based on knowledge and understanding of human behaviour, we can help our clients to stick to simple and basic investment principles, and to base their investment decisions consistently on underlying fundamentals.
Yet this only applies to those individuals who want to aspire to be a wealth management professional.
The product-oriented salesperson can also benefit from behavioural finance insights as they provide a rich source of ideas how best to capitalise on the proven concept of instilling greed and fear.
So if you consider your clients as sources of revenue, then there is no issue whatsoever in warning them about an impending collapse of the market, which requires them to buy some of your high-commission products. To put it another way, if the main purpose of having clients is to help you meet your KPIs, you will inevitably encourage them to be irrational so that you can financially benefit from it.
Further, if you are the kind of salesperson who pretends to adopt a fiduciary standard, whilst in reality are in the relationship to benefit personally from your clients, you are in unethical territory. You are simply fooling your clients by trying to make them believe that you have their best interests at heart. True fiduciaries, meanwhile – ie. professionals instead of plain salespeople – apply their superior knowledge about investing, psychology, structuring and insurance to educate their clients.
They help their clients be explicit about their goals and dreams, and to have a plan in place to achieve these goals. They furthermore help their clients benefit from the many scientific insights related to professional and responsible wealth management.
These are the professionals who ensure that wealthy individuals benefit from Kahneman’s legacy. And in doing so, they deserve to earn a good living in this highly value-adding wealth management profession.
More from Kees Stoute, Hubbis
Latest Articles