Behavioural finance is key to financial planners and, as a tool, if developed it can enable advisers to compete with robo advice phenomena, advisers have claimed.
Behavioural finance seeks to combine behavioural and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions.
Scott Gallacher, director at Rowley Turton Private Wealth Management, said: “Behavioural finance is absolutely key in all financial matters. It is an area that we financial planners will have over and above the role of robo-advice, because robo-advice always assumes what people tell you is true.
“It is about being aware of how people treat money. Some of it is nature, but a lot of it is nurture – the way people have been brought up.”
People seeking to understand the psychology behind the way they look at money are not only going to advisers for advice.
Some are getting unconventional help from the likes of Michelle Lowbridge, who describes her technique as 'energy editing' or 'wealth coaching'.
A trained kineseologist, which studies the mechanics of body movements, she has been able to combine the practice of psychology, stress-testing how muscles respond to different concepts around money. That way she can help people to clear the subconscious “money block” in their mind that drives them to make financial decisions that are not in their best interest.
Ms Lowbridge said everyone has financial stories or experiences usually developed from childhood which drives them to make decisions as adults.
She explained: “A lot of the work I do is clearing up subconscious patterns. What are the behaviours that will trip me up? Where did that behaviour come from? Unless you have done some work around that story, the chances are you will do it again.”
While Ms Lowbridge’s technique has won many followers, it has also brought out some skeptics.
Mr Gallacher may not fully subscribe to her method, but he said he understood the principle behind it. That of helping people to understand the reasons behind the financial decisions they make..
Agreeing with Mr Gallagher, Highclere Financial Services partner Alan Lakey said using psychology forms a key part of financial planning.
Mr Lakey added: “It is interesting to see this economic theory being propounded when financial advisers will have been involved in behavioural finance, albeit unwittingly, throughout their careers as advisers. Dry economics – as practised by academics – tries to explain the economic world in a mathematical way when advisers are fully aware investors are not rational.
“Proof, if needed, is that when share prices tumble the knee-jerk reaction is to sell and cut losses whereas the astute investor (in the minority) will buy more noting that they are obtaining a discount on the previous values which they were happy with.
“I’ve had a client lose £10,000 by investing in futures in such as pork bellies, in the full knowledge at the outset that he’s probably going to lose, but is intent on having ‘fun’. Rationality forms only a small part of financial decisions as other subtle factors mould decisions.
“Using techniques to gain trust, to persuade someone to do the right thing, etc. I do believe you can over analyse a situation and maybe behavioral finance best explains why it is that consumers make better decisions via an adviser.”
