Adhesion Wealth adds behavioral finance tools to investment plans

Joins efforts of other turnkey asset management providers in helping clients factor in fears, biases and emotions.

Adhesion Wealth Advisor Solutions is incorporating behavioral finance into its investment tools to help advisers communicate performance and other updates in a way that protects investors from themselves.
The firm is rewriting the questionnaire advisers give to new clients to identify their biases about money that could impact their investment choices, said Barrett Ayers, the firm’s chief solutions officer and managing director of portfolio management.
Client answers will place them into four different behavioral investor types, based on the research of Michael Pompian, a certified financial planner and expert in the field. Investment plans and communications will be generated for a client based on his or her risk tolerance, confidence level and tendency toward emotional or cognitive investing, Mr. Ayers said.
For a client identified as a “passive preserver,” for instance, statements and other communications will track performance toward goals and avoid using too many statistics and details, he explained. In contrast, an “independent individualist” may receive a risk-reward analysis and lots of detail.
“Advisers have been asking for something like this for a number of years, but the challenge has been how to harness behavioral finance research in a way that’s meaningful,” Mr. Ayers said. “We hope this allows advisers to communicate with their clients in an approach that’s consistent with their behavior type.”
The enhanced systems will be available by the end of February, Mr. Ayers said.
Adhesion joins other turnkey asset management providers, or TAMPs, in giving advisers a way to account for the impact that an investor’s fears, biases and emotional reactions toward their money can have on their portfolios.
Sheldon McFarland, Loring Ward’s vice president for portfolio strategy and research, said his firm started working with behavioral finance expert Meir Statman in the 1990s on ways to include his research in portfolio modeling and the client education process. Mr. Statman sits on the the firm’s TAMP investment committee.
“If you are building portfolios and managing money for real people, you need to incorporate behavioral finance,” Mr. McFarland said.
Loring Ward’s investment planning center helps advisers gauge not just how much risk clients will need to reach their goals, “but how much they can stomach,” he said.
Going into 2014, Mr. McFarland recommends advisers try to protect clients from “gambler’s fallacy,” or a tendency to over-predict reversals in situations that can’t be predicted, such as market returns.
Double-digit returns from the Standard & Poor’s 500 index and other equity markets in 2012 and 2013 have some investors thinking there has to be a reversal ahead, and wondering about whether they should invest this year.
This is a prime example of when advisers need to talk to these clients about sticking to their long-term plans, he said.