Report: Behavioral-Driven Factors Can Help Advisers Stand Out

In spite of stock market rebounds and emerging signs of recovery in various economic indicators, wealthy investors have apparently decided to exercise caution.

Although High Net Worth Individual (HNWI) clients have regained trust in their advisors and firms, their trust in regulatory bodies and financial markets has yet to fully recover.

According to the 14th annual World Wealth Report by Merrill Lynch Global Wealth Management and Capgemini, while 59% of HNWIs – defined as those having investable assets of $1 million or more, excluding primary residence, collectibles, consumables, and consumer durables – indicated they had regained trust in their advisor over the past year and nearly as many (56%) had regained trust in their wealth management firm, nearly three-quarters (71%) of HNWI investors have yet to regain trust in the regulatory bodies that are supposed to monitor the markets and protect investors.

“Emotional” Intelligence”

The report notes that those HNWI clients are “demanding fundamental changes in how they are served, and are rewarding firms that can clearly demonstrate a sharper understanding of their emotional and intellectual needs and objectives”.  “Behavioral-driven investing can serve as a differentiator among firms and advisors,” said Sallie Krawcheck, president, Global Wealth and Investment Management, Bank of America, announcing the survey results.  “Many firms are already beginning to embrace behavioral factors as part of HNWI investing strategies and the holistic advice they provide their clients. Long-term, however, firms and advisors understand that adapting a sustainable or profitable behavioral finance strategy means consistently capturing information that can drive deeper, go, in al-oriented conversations with clients consistently and efficiently.”

According to the report, while the level of industry adoption will probably vary, there are significant opportunities for leaders to reposition their Firms and drive further innovation, including the way in which:

  • advice is delivered
  • existing products are positioned
  • new products are developed and delivered
  • the service delivery model is tailored to reach more focused customer segments and behavior styles
  • the desktop tools for advisors, investment specialists, and clients takes client behavior into account.

“The investor’s psyche has been changed radically by the crisis, and now reflects deep-seated emotional biases. That shift applies to clients across all wealth bands—from mass affluent to Ultra-HNWI—so for Firms and Advisors, it will be critical to deliver the right level of high-touch advice and market-relevant product and service innovation to meet the needs of all clients in a scalable way,” according to the report.

“With the crisis having such an impact on investors’ wealth and with investor confidence still tenuous, it isn’t surprising that many investors are being driven by emotional factors – in addition to intellectual information – when making investment decisions,” said Bertrand Lavayssière, managing director, Global Financial Services, Capgemini. “In response, wealth management firms and advisors are already adjusting their approaches to engage in greater dialogue that addresses their clients ongoing concerns.”

Transformation and Change

The report authors say that adapting to these new market realities and changing client behaviors will require different degrees of transformation and change that can potentially “affect all aspects of the operating model, including products, processes and platforms, and service models. The specific adaptations each firm ultimately makes will depend on the firm, its size, focus, specialization and its vision for its future, as well as its desire and ability to adapt and lead.”  As a result, the report says it will be “essential to deliver the right level of high-touch advice and market-relevant product and service innovations to meet the needs of all clients in a scalable way”.

That said, these investors have not rushed to chase performance or seize risky market opportunities, according to the report.  Those high net worth individuals have remained cautious, citing effective risk management (90%), transparency and simplicity (93%), and specialized advice (93%) from firms and advisors as top priorities in the current environment. The report says that HNWIs are especially keen as they work more actively with their advisors to “properly understand the nature and potential performance of specific investments, manage their downside risk, and receive advice that is aligned with realistic and appropriate goal-setting, based on their actual risk profile”.

“The crisis hit investors at every level of wealth and impacted them on a personal and emotional level,” said Krawcheck.  “Many lost incomes, saw their retirement savings shrink or tried to open new businesses or take out loans but were unable to find cash.”

To download the 2010 World Wealth Report, please visit