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Should behavioural bias be classed as a vulnerability in asset management

by Heat Recruitment

Confirmation Bias, the Gamblers’ Fallacy, Negativity Bias, Endowment Bias… there are a huge range of well-known principles that influence human psychology and, therefore, the decisions that are made off the back of these impulses. It’s no different in the wealth and asset management sector.

Bias in asset and wealth management is an ongoing issue. There was a fascinating article in Investopedia recently which looked at the differences between cognitive and emotional bias in investing. They noted that the same filters we use for our day-to-day decisions, which are driven by behavioural patterns, also guide actions when investing.

Clients, in essence, pay asset managers to make informed decisions to grow their own wealth. If said client sees something in the news and makes an irrational decision, they could damage their own financial prospects.

So, should behavioural bias, both from clients and asset managers, be classified as a vulnerability?

Martin Lines, business development director at Just Group plc, recently spoke at the Chartered Institute for Securities & Investment’s Paraplanner Conference. He noted that: “Behavioural research shows us consumers are not economically rational super consumers, and this is very close to what the FCA has said around vulnerability.

“Sometimes I think you undervalue your knowledge and experience against the average consumer in the UK. About half the adults in the UK have the numeracy skills of an 11-year-old.”

The Financial Conduct Authority published a paper in 2015 which criticised financial services firms for “streamlining” consumers – offering products and services that were inappropriate for their needs. The regulator, according to, made the same statement in 2017, stating that it “expected consumers to take reasonable responsibility for financial decisions but firms still had to take the needs of vulnerable consumers into account.”

Traditional risks are well guarded against in financial services, or at the very least are. Market dips, geopolitical issues, legislation cyber-attacks, loss of data. The risk posed by less financially literate clients, however, is one that is significantly more difficult to guard against. It comes down to the very structure of a financial services business.

We see two strategies in wealth and asset management currently. The first is outcome-based, and the second is using benchmarking.

Benchmarking is the more traditional service offered by wealth and asset managers. In essence, the way wealth and asset managers track performance based on external metrics. This is a service more favoured by the financially literate but is being pushed out as financial literacy decreases.

Outcomes based investing may now be the future of the industry, being more inclusive of the “I want to be able to retire” crowd. It’s a much more sustainable operating model and is more inclusive of people without a sound financial backing. This strategy is solely focussed on achieving specific (tangible) client outcomes.

The risk of this approach is an imbalanced experience-base. Wealth and Asset managers are undoubtedly advantageous in terms of their financial knowledge, so the relationship becomes more trust based than actively directed.

If there’s one thing that wealth and asset managers need to do to mitigate the risk behind client decisions, it’s relationship building. Building that level of trust between manager and client means that decisions made can be justified and backed up on a trust basis. For the compliance department, arguably, more insight could be needed in the long term… but in the short term, it has to come down to the relationship.

If you’re looking to hire top talent in the financial services sector, get in touch with our expert team at Heat Recruitment today!

By Alex Russon