The Importance of Personality
by Robert Juxon
One of the interesting things about Seventy Thirty is its work in psychologically profiling its clients to maximise the likelihood of success and so "the client experience". Seventy Thirty has in many ways been a pioneer in this, taking the mass dating market to a far higher level of bespoke service. As a private banker working in wealth management, I can see similarities in the value of personality profiling significantly improving a client's decision making and investment experience.
When considering making investments, the starting point usually has some sort of aim to maintain and grow purchasing power, i.e. to seek returns higher than inflation, net of tax and costs. To establish how to put this into practice, the industry standard is to try and lump people into one of five or six risk profiles according to how much risk they may be comfortable taking. Investments are then made according to that perceived level. We believe this is too simplistic, as a measure of mere risk appetite is far from enough to result in the most appropriate portfolios.
The more advanced approach is to use psychometric techniques aimed at gaining insight to the actual, rather than perceived, risk attitudes and behavioural traits important in investing. Following two years of research by industry leading, behavioural finance practitioners we have created a means of measuring a client's attitude to financial investing via these personality traits. We call it measuring someone's "financial personality" and believe it is not something that has been properly tackled in the wealth management industry until now.
Of the personality traits, risk tolerance is certainly an important factor and looks to measure how someone may reconcile two competing desires: the desire to avoid losses, and the desire for gains. Different people will trade these differently with some more happy than others to accept the possibility of losing some of their wealth so that they can access the types of investments that might also achieve very high returns.
However, this is very different to the second trait of composure. Composure seeks to understand how an individual may feel about, react to, and cope with uncertainty in financial situations. Some people have greater needs for the emotional stability they get from certainty of financial returns than others. Those with low composure scores are likely to monitor their portfolio more frequently and thus perceive portfolio outcomes on an artificially short timeframe. This can exaggerate the proportion of losses relative to what they would see if focussed more rationally on a longer term time-horizon. Such issues are critical when implementing a portfolio so a client can be comfortable with the experience. Generally we would advocate more absolute return strategies to those with lower composure.
There are further traits of market engagement, desire to delegate, belief in skill, and the individual's own perception of financial expertise. For example, those with a lower belief in skill would tend to find it more appropriate to have more passive investments than actively managed ones.
The overall result produces a highly bespoke set of results that help both clients and wealth managers implement the most appropriate solutions. Behavioural finance as applied to private investors is truly helping private banks find the means of making much more appropriate investments for their clients and indeed clients have even found it interesting to know what their "financial personality" looks like.
Robert Juxon is a private banker at Barclays Wealth
robert.juxon@barclayswealth.com