Launched approximately four years ago Barclays Wealth’s behavioral finance unit got a head start before the discipline increasingly gained steam amongst the financial community in the wake of the financial crisis.
Barclays spent a year developing its Financial Personality Assessment (FPA) before rolling it out to clients. Greg Davies, head of the bank's Behavioral Finance and Investment Philosophy unit, told Family Wealth Report that there was "no better time to stress test" the process than during the financial crisis.
The FPA was developed from proprietary psychometric research performed by Barclays Wealth’s behavioral finance team.
The approach is not cookie cutter. It goes well beyond profiling investors’ risk tolerance based on a typical sliding scale of low, moderate and high. It aims, for example, to capture in an objective way whether a client was composed in the face of market shifts, their desire to get involved in decision-making, willingness to delegate decision-making, expertise and belief in the benefits of skill.
“Risk tolerance is not one dimensional,” Davies said.
The FPA consists of 36 questions. Answers to the questionnaire generate a profile that measures six traits that describe a client’s financial personality: risk tolerance, composure, market engagement, perceived financial expertise, delegation and belief in skill.
The first three factors reflect clients’ attitude to risk, while the other three reveal how they make investment decisions.
The FPA generates and in depth individualized profile and is a starting point to address how each client’s portfolio will be customized.
It is part of what Barclays calls its Total Wealth Review. The review takes into account all components of an investor’s investment profile, including time horizons, income requirements, liquidity profiles and taxes.
The questionnaire was first rolled out in the UK and has been deployed across Europe, the Americas, the Middle East and Asia. So far more than 10,000 clients and prospects worldwide have participated.
As part of the process wealth advisors undergo extensive ongoing training. They are taught how to interpret the results, how to use them, product selection and how to communicate ideas. Role playing is also a part of training.
Barclays’ takes a symbiotic approach to behavioral finance within the bank. It is built into infrastructure, product development and research.
"The Barclays Wealth investment philosophy is such a fundamental component of how Barclays Wealth builds relationships and serves clients that we have, and continue to, make significant investments to build these ideas into our processes, infrastructure, and proprietary systems and tools - a framework by itself is insufficient to drive behavior: it is by building the concepts into the fabric of the organization that we can ensure our investment philosophy genuinely enhances the client experience," Davies said.
"These systems and tools not only enable Barclays Wealth to holistically understand clients' wealth management needs, they also operate at an even more granular level: They allow us to identify the most appropriate product-level advice," he added.
Including Davies the unit has a five member team, four of whom haves PhDs. Davies joined Barclays in December 2006. He holds an MPhil in Economics and a PhD in Behavioral Decision Theory, both from Cambridge University.
Davies’ commercial experience includes a stint at Oliver, Wyman & Co., a financial services strategy consultancy as well as serving as director at Decision Technology, a consultancy originating in the cognitive psychology department of Warwick University, which specializes in commercial applications of academic decision sciences, and behavioral economics.
Also based in the UK is Daniel Egan, Behavioral Finance and Investment Philosophy expert, who was instrumental in developing the FPA.
Egan joined Barclays in 2007. Previously, he worked at Chiliogon, a corporate finance advisory and investment fund firm in the UK. Prior to that, he was a health economics researcher at the University of Pennsylvania.
He holds a BA with Distinction in Economics from Boston University and a MS in Decision Science from the London School of Economics.
Based in the New York, Michael Liersch, Behavioral Finance and Investment Philosophy expert, focuses on combining the emotional and scientific dimensions of investing to guide clients to a personalized portfolio that matches their financial personality and investment objectives.
Liersch joined the team in July. Previously he was a visiting professor at New York University's Stern School of Business, where he conducted research in behavioral finance, as well as judgment and decision making.
Liersch holds a BA in Economics from Harvard University and a PhD in Cognitive Psychology from the University of California, San Diego.
Working closely with the behavioral finance team is Joseph Dursi, head of Portfolio Consulting and Wealth Management Reporting Consulting, Americas. Based in New York he manages a 10-person team responsible for customizing clients' portfolios.