Retaining Affluent Clients

Creating a Segment of One

Publication Date	April 2008
Publisher	VRL KnowledgeBank
Product Type	Report
Pages	159
ISBN Number	not applicable
Product Code	VRL00014

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Summary

Affluent Customers - A Growth Market Affluent clients have long been recognised as a major business growth opportunity across the banking world, perhaps even more so given the ongoing problems connected to subprime
In successfully targeting the affluent, most retail banks have a number of major obstacles to navigate, including:

Organisational design
Operational support
Creating and implementing a great customer experience
Finding the right marketing mix

Losing Clients Is Easy

Having done this, the bank might be surprised to discover that while acquiring private clients is difficult and expensive, losing them, on the whole, is easy. Banks and brokerages lose clients for a host of reasons - and contrary to popular belief, the primary reason is not because of poor investment results. The most common reason is that at a 'micro' level, financial advisers fail to sufficiently 'get inside the head' of their clients, in order to build a solid personal and financial relationship.

The Importance Of The Adviser

All research into successful banking of the affluent focuses on the importance of the relationship manager. The list of required attributes for the job is lengthy. What makes this even more daunting is the knowledge that if an adviser is unable to deliver what the client expects, there is a host of other providers who are capable of doing so
What must an adviser offer to stop business going elsewhere? The answer suggests Michael Pompian really understands the client. In particular, to recognise that emotional behaviour has a major bearing on investment decision-making. Many advisers' natural reaction is to shy away from this side of their clients; however, the key is to work WITH these forces - the results as measured by reduced client churn and increased profits and time-savings for the adviser will be truly extraordinary. The argument that emotions impact upon investment behaviour is not new. Adam Smith and John Maynard Keynes discussed the phenomenon in depth. The technology bubble illustrates what happens when optimism is out of control and a number of calendar anomalies still endure, in particular 'The January Effect' whereby certain stock (small stocks in particular) deliver abnormally high returns in that month.

How should a financial adviser proceed?

This report presents the means to profitably retain clients. It addresses three key issues:
1. Formulating financial goals Experienced financial advisers know that defining financial goals is critical to creating the right investment programme. To do this, it is helpful to understand the client's psychology and emotions. Behavioural finance permits financial advisors to really understand clients when engaging in the critical task of setting financial goals, allowing advisers to deepen the bond with the client, creating better investment outcomes and a better advisory relationship.
2. Maintaining a consistent approach Most successful advisers use a consistent approach to delivering wealth management services. Incorporating the benefits of behavioural finance can become part of that method and would not involve large- scale changes in the adviser's approach. Behavioural finance will add professionalism and structure to the relationship as advisors get to know the client prior to delivering investment advice.
3. Delivering what the client expects Addressing client expectations is essential to a successful financial advisory relationship. In many instances the adviser does not deliver the client's expectations because the true needs of the client are 'hidden' behind behavioural biases. Behavioural finance provides a context in which the advisor can 'take a step back' and attempt to really diagnose the motivations of the client. Having got to the root of the client's expectations, the adviser is equipped to action them.

The relationship between adviser and client is the critical success factor in a profitable affluent banking programme. The main reason banks lose affluent customers is not poor investment results, but the failure to understand and 'get inside the head' of clients. Unsurprising, given that a typical adviser could easily have over 300-plus clients, all of whom have diverse risk appetites, financial goals and emotional preferences, both stated and unstated. Using the techniques explained in this report, a time-poor financial adviser can deliver improved client retention, growing profit per client as well as a host of spin-off effects that will result in an exceptional share of wallet won.

This report explains:

Why the traditional approaches to understanding investor behaviour are insufficient
The twenty most common investor biases
How to discover and resolve biases

It also provides:

Diagnostic toolkits and client questionnaires
Hands-on case studies
Exclusive interviews with 25 leading wealth management practitioners from the USA, Europe and Asia

A glossary of key terms and concepts

Content

Executive Summary
- Conclusion and Recomendations
- Formulating financial goals
- Maintaining a consistent approach
- Delivering what the client expects
- Introduction The Affluent
- Why are the wealthy important?
- Different approaches across the globe
- What are the key drivers of growth?
- Demography is one of the key drivers in the wealth
- management sector
- Changing patterns in society
- What are the key factors in a successful affluent program?
- Professional skills
- Other key characteristics of an adviser Coping with the
- client workload
- How well are advisers doing?
- The spin-off value created by a good adviser
- Conclusion
RETAINING AFFLUENT CLIENTS: CREATING A SEGMENT OF ONE
Chapter 1: What is Behavioural Finance?
- Behavioural finance: the big picture
- Behavioural finance micro versus Behavioural finance macro
- The two great debates: standard finance versus Behavioural finance14
- Overview
- Efficient markets versus irrational markets
- Fundamental anomalies
- Technical anomalies
- Calendar anomalies
- Rational economic man versus behaviourally-biased man
- Perfect rationality
- Self-interest
- Perfect information
- The role of behavioural finance with private clients
- How practical application of behavioural finance can create a
- successful advisory relationship
- So, how can behavioural finance help?
Chapter 2 Overview of 21 Prominent Behavioural
- Finance Biases
- Overconfidence bias
- Prediction overconfidence
- Certainty overconfidence
- Representative bias
- Anchoring and Adjustment bias
- Cognitive Dissonance bias
- Availability bias
- Self-attribution bias
- Illusion of control bias
- Conservatism bias
- Ambiguity Aversion bias
- Endowment bias
- Self-control bias
- Optimism bias
- Mental Accounting bias
- Confirmation bias
- Hindsight bias
- Loss Aversion bias
- Recency bias
- Framing bias
- Status quo bias
Chapter 3: Five Summary Findings of Research Studies
- Boys will be Boys: Gender, Overconfidence, and Common
- Stock Investment
- The Endowment Effect, Loss Aversion, and Status Quo Bias
- The Disposition to Sell Winners Too Early and Ride Losers Too
- Long: Theory and Evidence
- The Impact of the Examination of a Property on the Perception of
- Value and the Desirability of a Following Property
- Irrational Pessimism and the Road to Revulsion
Chapter 4: Practical Application of Behavioural Finance
- Case Studies
- Introduction
- Guidelines for determining when to regulate and when
- to adapt
- Introduction to case studies
- Best practical allocation explained
- Case study 1: Mrs Ocean
- Case study 2: Mrs Moon
- Case study 3: Mrs The Sun Family
- Summary
Chapter 5: Original Research Study: Trends in the Use of Behavioural Finance with Private Clients
- Interpretation of responses
- Responses by category
- Conclusion
Chapter 6: Advisor Interviews
- Advisor interview 1: Kevin A
- Advisor interview 2: Royce B
- Advisor interview 3: Paul B
RETAINING AFFLUENT CLIENTS: CREATING A SEGMENT OF ONE
- Advisor interview 4: Silvio B
- Advisor interview 5: Jeffrey B
- Advisor interview 6: Peter B
- Advisor interview 7: John C
- Advisor interview 8: Maggie C
- Advisor interview 9: Gabriele D
- Advisor interview 10: Tony E
- Advisor interview 11: Harold E
- Advisor interview 12: Gord F
- Advisor interview 13: Yehuda F
- Advisor Interview 14: R G
- Advisor interview 15: William K
- Advisor interview 16: Damon K
- Advisor interview 17: Bin L
- Advisor interview 18: Gary M
- Advisor interview 19: Raymond M
- Advisor Interview 20: Michael M
- Advisor Interview 21: Brigitte M
- Advisor Interview 22: Richard M
- Advisor interview 23: Nancy P
- Advisor Interview 24: John R
- Advisor Interview 25: Andrew R
- Advisor interview 26: Drake Z
Appendix A:The History of Behavioural Finance
- Introduction
- Historical roots
- Rational economic man
- Modern Behavioural Finance
- 20th Century experimental economics: modelling individual
- choice
- Cognitive psychology
- Decision-making under uncertainty
- Kahnemann and Tversky
- Kahnemann and Riepe
- Psychographic models used in Behavioural Finance
- Barnewall two-way model
- Bailard, Biehl, & Kaiser (BB&K) five-way model
Appendix B:Key Figures in the Recent Development of
- Behavioural Finance
- Professor Robert Shiller
- Professor Richard Thaler
- Professor Hersh Shefrin
- Andrei Shleifer and Meir Statman
- Daniel Kahneman and Vernon Smith
Appendix C:Key Concepts and Terms Used
LIST OF TABLES
- Table 4.1: Typical risk tolerance questionnaire
- Table 4.2: Sample behavioural asset allocation adjustment factor (BAAAF) model output (%)
- Table 4.3: Behavioural asset allocation adjustment factor (BAAAF) model for Mrs Ocean (%)
- Table 4.4: Behavioural asset allocation adjustment factor (BAAAF) model for Mr Moon (%)
- Table 5.1: Respondents to behavioural finance survey by country. 2007
- Table 5.2: Question 6 Are you of the opinion that individual investors (your clients) make irrational decisions - as opposed to believing that they always make rational investment decisions?
- Table 5.3: Question 7 Are you familiar with any irrational investor behaviours (biases) such as mental
accounting, loss aversion or anchoring?
- Table 5.4: Question 8 -If you answered yes to question 7, please indicate if you have recognised any of the
following biases when working with your clients?
- Table 5.5: Question 9 Have you every attempted or been successful in helping a client to deal with any one
of these irrational investor behaviours in your clients?
- Table 5.6: Question 10 If you answered yes to question have your ever attempted or been successful in
elping a client to deal with any one of these irrational investor behaviours in your clients- please indicate what you did to help your client?
LIST OF FIGURES
- Figure 4.1: Guidelines for determining when to regulate and adapt
- Figure 4.2: Adapt and regulate recommendations for high and low wealth level clients
- Figure 4.3: Guidelines for determining when to regulate and adapt Mrs Ocean
- Figure 4.4: Guidelines for determining when to regulate and adapt Mr Moon
- Figure 4.5: Guidelines for determining when to regulate and adapt the Sun family
- Figure 4.6: Illustration of outcomes of individual investor case studies
- Figure 5.1: Behavioural finance survey
RETAINING AFFLUENT CLIENTS: CREATING A SEGMENT OF ONE
- Table 5.7: Question 12 Do you believe that you would find value in learning more about irrational investor
behaviours to better serve your clients?
- Table 5.8: Question 13 -Do you believe that you will seek information in the future on irrational investor
behaviours to better serve your clients?