Money is one of the most emotional topics there is. Yet when it comes to how we plan with it, how we think about it and how we live with it, the world does a strangely good job of pretending the opposite is the case.
Both investors and those that advise them often act as if money is an incidental fuel for behaviours, not an integral shaper of them.
It is a tempting thought: in a complex world, money offers objective certainty, and the universally "best" answer to how to earn, spend or invest money is just a clever spreadsheet calculation away.
With investing specifically, the typical approach suggests that what is right for one person is right for another, because it is all just money – fungible, predictable and free of feelings.
Investing is typically seen as a one-size-fits-all game, as if humans turn into robots the second they start to own investments.
Why else would so much attention be paid to the initial investment selection relative to the experience of owning those investments, and all the feelings doing so can inspire, for possibly many decades thereafter?
Yet there is no such thing as a "best" investment. Only the best investment for someone, given the unique combination of not only their willingness to take risk for the chance of a reward that justifies it, but also their financial situation and their financial personality.
FCA consumer duty recognises investors as humans
The good news is that this is being slowly but surely recognised.
In the latest legislation from the Financial Conduct Authority – consumer duty – there is specific guidance telling advisory firms they need to show how they account for their clients’ "needs, characteristics, and objectives", including ‘how they behave, at every stage and in each interaction’, acknowledging, when doing this, that investors "are susceptible to cognitive and behavioural biases".
And in the latest EU regulation, the guidelines state: "Provided that all the information and reports given to clients shall comply with the relevant provisions… firms should also carefully consider whether their written disclosures are designed to be effective."
Effective disclosures are emotionally conscious disclosures, because in addition to their financial ability to take risk, each investor also has an emotional ability to take risk: a behavioural capacity that determines how best to interact with investments to ensure ongoing comfort with the risk being taken.
When it is owned by a human, no investment can be called "best" – regardless of its financial return – if owning it causes its owner to feel anxious or make costly mistakes every time they are reminded that they own it.
Communication, communication, communication
It has been shown again and again in behavioural research that our decisions are hugely influenced by the way information is presented to us. There is rarely a need to change a portfolio itself to radically change the experience of owning it.
Investor management is often just as – if not more – important than investment management.
Investment-management solutions to behavioural "problems", such as reducing risk levels for anxious investors, are usually an unnecessarily costly way to provide an investor with comfort, relative to investor-management ones of tailoring how financial decisions are made and how portfolios are positioned and presented, based on each investor’s financial-personality signature.
