My interest in behavioural finance dates back a few years to a podcast interview I did for Meaningful Money, the personal finance brand I set up to help people on their financial journey.

    The interviewee was Greg Davies, then head of behavioural-quant finance at Barclays and now head of behavioural science at Oxford Risk.

    Greg recounted the story of Ulysses and the Sirens as an entry point for understanding behaviour.

    For those of you who aren’t familiar with it, Ulysses is tasked with taking his ship past the island of the Sirens. The Sirens are known for their beautiful singing, but lure sailors to their deaths as they get closer to hear the singing and crash on the rocks. 

    Ulysses wanted to hear the singing, but he didn't want to put his ship in danger. So he had his crew tie him to the mast so that he couldn't move, and he had them stop up their ears with beeswax.

    The point is that he thought ahead and said to himself: how can I put a framework in place that gives me the best of all options here?

    Greg uses that story to demonstrate that by knowing what our tendencies are, and by having some insight into them, then perhaps we can build frameworks and systems to then make better decisions.

    We almost force ourselves to make better decisions by 'pre-thinking' them. That idea really resonated with me.

    The practical application

    I’ve chosen to use behavioural insights through Meaningful Money, and in particular on the Meaningful Academy site. This offers courses geared around financial foundations, building wealth and retirement planning.

    As part of that there’s a course on behavioural finance and the biases people need to look out for.

    I’m using the tools from behavioural insights firm Be-IQ tools to support this.

    I introduce Beam as an app that people can use to get a decent handle on not just their attitude to risk, but also learn more about their behaviour.

    By playing a series of say 10 games over 25 minutes, they can gain real insights into their financial behaviour. I’ve also got access to the Beacon adviser dashboard that sits alongside the app.

    This period in history we’re in right now, what with coronavirus, various lockdown restrictions and the initial market volatility, is exactly the kind of time where having in-depth insight into client behaviour can be really useful.

    Most advisers will instinctively know which of their clients are more likely to be anxious in any given situation. But I think a knowledge of behavioural finance just adds meat to that.

    For advisers, probably the biggest benefit of having behavioural insights at your disposal will be the ability to set things up in the right way for new clients who you don't know well.

    If you've had a client for 10 or 15 years, you should have a pretty good understanding of how they tick. If not, you're failing them as an adviser.

    But when a brand-new client comes to you, it can be hard to get that information.

    A personal story on risk

    My career in many ways was defined by a particular client who had been a client of the firm for a long time but who was new to me back in 2007.

    He had built a very successful business, which he had then sold for several million pounds.

    As an entrepreneur I took him to be a bit of a risk taker, and at the time his answers to our risk questionnaire put him as balanced to moderately adventurous.

    Yet he was on the phone to me for an hour every day for about six weeks through the teeth of the financial crisis, absolutely panicking.

    I realised then that despite the two or three meetings we had before I invested £1m for him, I just thought to myself: 'I completely didn't get you.’

    He was invested inside an offshore bond, and we looked to move him to cash inside the bond, but the issue was compounded when he chose one of the Icelandic banks to hold the cash, which later went into liquidation.

    This then turned into a complaint, which our professional indemnity insurance paid out on – the only complaint we’ve ever had upheld in nearly 50 years of business.

    But we could have avoided all of that if I had actually understood that this client should have stayed in cash in the first place. I overlaid way too many assumptions about entrepreneurs and risk taking.

    That experience taught me a lot.

    It taught me to get a lot better at questioning and building scenarios for people and asking, 'what if this happened, how would you feel?'

    So while good advisers will think that way anyway, having the behavioural tools and insights to hand hopefully gives us as advisers more of a technical tool to support that.

    Coaching, behaviour and financial planning

    Increasingly, advisers live in a world where you just don’t need to intermediate products for people.

    In a sense the adviser role has always been about relationships, and the idea that ‘people buy people’. If you’ve earned a client’s trust, then that's an incredible privilege.

    But I just think people are going to need deeper and deeper support around behaviour and coaching.

    Advice won't be about choosing the investments, or the platform or anything like that. It will be about having a plan and helping clients manage themselves.

    That's why Andy Hart’s Humans Under Management movement is inspired. That's exactly what we do -  we manage people, not money. Behavioural insights are a tool in that box.

    Costs will continue to be squeezed, the regulatory burden will increase, and we have the prospect of new players coming to the advice market.

    In a world where people can do everything themselves, as long as they know the questions to ask, then what are advisers going to get paid for?

    I’m expecting a shift to more of a coaching model, and if and when that happens, this kind of insight into the client’s financial psyche is going to be invaluable.

    We’ve recently also seen an increasing momentum around the importance of financial wellbeing.

    Yet both coaching and wellbeing have very little to do with money in and of itself. It’s about how we interact with our aspirations and goals. To what extent are these in focus, and do they feel achievable?

    The difference behavioural insights make to the financial planning process is hopefully a deepening of the relationship between clients and advisers. I appreciate that sounds dreadfully touchy feely, and we tend not to do that sort of thing in the UK.

    But it's an intensely trusting relationship.

    When you've got money on the table, and you're handing over control of that to an individual, that's just an insane amount of trust, and I think we forget that as advisers sometimes.

    You might share your darkest concerns or worries with your priest or your minister, and share your health stuff with your doctor, and your financial stuff with your accountant. But an adviser gets to deal at a deep level with all three of those.

    When you meet somebody who really gets you, that's an incredible power. If we ever meet somebody we really connect with, it can feel like you've known that person all your life.

    Having behavioural tools and this kind of insight at your disposal potentially gives advisers a headstart on that.

    Advisers may decide to become scholars on the subject of behavioural finance, and understand the different biases at play.

    But taking that a step further, let’s say you’re in front of a client who's taken the time to play these behavioural games via the app, and to give you this insight.

    By being able to pick out one thing about their financial behaviour and speak it back to them, then they'll connect.

    So hopefully this represents a marked headstart in building deeper adviser/client relationships and, as such, a greater level of trust.

    I think the good advisers do that instinctively anyway, but this can only help. I'm excited about the potential.

    Nucleus, in partnership with Be-IQ, has produced a white paper on The role of behaviour in financial planning. You can download your copy here

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