Perhaps social norms suggest taking advice from those in a depressed state (the quintessential indolent). Failure to follow this advice could result in abysmal consequences. Recent research suggests wealth managers who outwardly exhibit pessimistic, depressed and anxious behaviours will, perhaps paradoxically, provide unsurpassed advice.
Arguably one of the many absurdities of investing is that investors predominantly start from a negative standpoint such as “How much money can I lose?” Irrespective of means, investors habitually anticipate the undesirable outcomes first, ignoring the course of action and risk they must take to achieve their financial goals. In the UK (possibly biased by the regulator and in contrast to the United States) when investing your surplus reserves, greed should be avoided. Greed is not good – negativity is good.
But the beliefs found in numerous cultures encourage pursuing the red-braced Gordon Gekko variety of wealth manager. Quick-talking wide boys, clad in expensive suits and driving the latest Mercedes AMG are preferred to the more conservative, even dull, wealth manager. Prospective investors erroneously believe following the advice of the seemingly successful individual will somehow transfer their success to them by osmosis. Of course, modelling risky investment behaviour often results in unwelcome losses.
Even in the post-retail distribution review world, the sycophantic wealth manager, chasing widows and ladies who have recently divorced amillionaire husband, is a representation many can relate to. Advisers and wealth managers do suffer from an image problem, going back to 1915 John Buchan in his seminal The 39 Steps described the financial adviser Marmaduke Jopley plying his trade by “toadying eldest sons of rich young peers and foolish old ladies”.
So what is the answer if you wish to invest and get a holistic and/or possibly pessimistic view? To avoid the outwardly successful wealth manager what other options do investors have? A possible solution is to take the contrarian view, ignore social norms and snub the Gordon Gekko variety of wealth manager. What would this contrasting animal look like? Unbelievably the advice of a depressed and anxious wealth manager ought to result in improved financial outcomes compared to the exultant and frenzied city trader types.
Depression is an enormous problem in Britain. According to the Mental Health Foundation, 25 per cent of the UK population will experience some kind of mental health problem in the course of a year, with anxiety and depression the most common mental disorder in Britain. Women are far more likely to suffer from depression and 10 per cent of children under the age of sixteen will suffer some sort of anxiety or depression.
Individuals with high anxiety tend to be risk averse while depressed people tend to make better inter-personal judgements and process information in a more impartial data-driven way. Depressed people are less prone to bias when they make decisions for others.
Generally a depressed wealth manager would make decisions based on what they would do themselves. Depressed individuals tend to look at the drawbacks, be negative and aim to advise on taking less risk than they themselves would take. Non-depressed wealth managers would normally advise clients to take more risk than themselves.
The FCA has questioned many of the client risk questionnaire tools on the market – arguably the risk metrics and behavioural issues for both the client and adviser are perhaps incalculable. Until the industry and the regulator begins to consider that both advisers and clients make decisions on attitude to investment risk and investing on heuristics and not theory or logic the industry will not move forward and improve client outcomes and increase real long tern value.
Richard Bishop is a lecturer in financial services at Coventry University College and a practising regulated financial adviser
