Behavioural finance new tool for TD Private Wealth Management

behavioural finance wealth manager finance advisorThe Toronto-based TD Wealth Private Wealth Management (TD Wealth PWM) launched a new technology tool, that uses ‘behavioural finance’,  aimed at helping the firm’s financial advisors illuminate “financial blind spots” that their high-net-worth clients may have when they’re making their investment decisions.

Behavioural finance will help to prevent emotions from overriding logic in the financial decision-making process, by looking at how personality influences financial decisions. While it’s a relatively new area of study, behavioural finance is quickly gaining momentum among the academic and investment community and is now considered a pillar of behavioural economics, a broader field of study that explores the effects of psychological, social, cognitive, and emotional factors on economic decisions.In this case, the science behind behavioural economics — and more specifically behavioural finance — goes well beyond academic theory, explaining why people sometimes make biased, unpredictable or irrational financial choices.

The new TD Discovery Tool will create a wealth personality report for those high-net-worth clients, defined as those having $750,000 plus of investable assets, based on their answers to an optional questionnaire.  “Advisors will be able to use the Five Factor Model of Personality wealth personality report to develop a customised investing strategy based on the personality traits and individual experiences of their clients,” said Jeet Dhillon, vice president and senior portfolio manager for TD Private Wealth Management. “The better we understand a client’s decision-making rationale, the better advice we can give to help them meet their financial goals”.

“We all have biases in how we make financial decisions. Even the savviest investors can benefit from knowing their so-called wealth personality”, commented Rotman School of Management finance professor Eric Kirzner, while the marketing professor Ken Wong of Queen’s University’s Smith School of Business considers TD’s new product “a bold response to the emerging services offered by fin-tech (financial technology) and Robo-advisors.”

For clients, it means a “more meaningful and personalised financial conversation and ongoing relationship with their advisor,” says Dave Kelly, senior vice president, private Wealth Management, TD Wealth.

behavioural finance

You’ll be able to schedule a discovery session with a TD advisor to uncover your Wealth Personality, which may let TD Financial advisors uncover some of these most common traits:

  • Framing Effect. Responding to the same problems differently depending on how they are presented. For instance, you may view a 10 per cent loss on a $1 million portfolio differently than a $100,000 loss, even though those are the same thing. In this case, you’d have to consider:
    – Examining investment from various perspectives
    – Becoming aware of how you respond to presentations of your portfolio – i.e. percentages vs. dollar amounts
  • Familiarity. The tendency to over-invest in what you are familiar with. You may have a tendency to invest more heavily in companies or industries you know, particularly those in which you work, which could lead to an overconcentration in a specific sector.
    In this case, you’d have to consider:
    -Working with an advisor to help you develop a diversified portfolio
  • Sensitivity to Noise. Recent information can tempt you to rethink your established investment strategies and then make reactionary changes to your portfolio at inopportune times based on the latest news, which could negatively impact your portfolio. In this case, you’d have to consider:
    – Seeking out more information to dig deeper beyond the headlines
    – Seeking your advisor’s advice before making changes to your portfolio
  • Loss Aversion. The tendency to feel losses more strongly than gains. If your portfolio lost 10 percent in value, this might generate a stronger emotional response than a 10 percent gain in value. In this case, you’d have to consider:
    – Talking with your advisor about your risk tolerance and developing a goals based plan that you feel comfortable with
    – A formal insurance or estate plan review
  • Short-Term Focus. The tendency to value a reward that arrives sooner and to discount a reward that arrives later. You may have a hard time visualising retirement income and expenses or have difficulty saving for a future goal. In this case, you’d have to consider:
    – Talking with your advisor about the tools they have to help you estimate cash flows in retirement
    – Setting up regular deposits into an investment account to save for what matters to you
  • Overconfidence. You overestimate your own investment ability, so you engage in higher trading activity than the average person, which has been shown to lead to lower returns. In this case, you’d have to consider:
    – Consulting a tax advisor to understand the potentially negative impacts
    – Looking at the bigger picture when making decisions – Keep your wealth goals in mind in addition to traditional benchmarks

Further reading: The Undoing Project and how behavioural economics ideas were shaped

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