by Paul Pugh, Head of Strategic Alliances, Canada Life Asset Management
At Canada Life Asset Management (CLAM), we understand that having the most effective tools at your disposal, especially when markets are volatile, can help you deliver more attractive gains for your clients. Themes we explored in detail at March’s Dynamic Planner Conference included:
- The difference between cognitive and emotional bias
- Common biases and how to manage them
- How awareness of these can help with fund selection and client engagement
What is behavioural finance?
Behavioural finance is the understanding of how human emotion can shape investment behaviours –behavioural biases. Understanding these biases can be a powerful tool for advisers when advising clients, by helping to gain a deep understanding of their motivations and how they react to market shifts. Unlike institutions, which tend to have very clear definitions of risk, an individual investor is more likely to have feelings about risk, and for them risk analysis is an emotional process.
Behavioural biases can skew investors’ perceptions, causing them to allow shorter term market movements to dictate longer term goals. By identifying and managing these biases, advisers can steer clients for better outcomes. We believe that this is a better way of achieving a ‘real world’ picture of investors’ behaviour and motivations than solely relying on data – reflecting the way the FCA wants advisers to approach the Consumer Duty.
How can advisers use an understanding of behavioural biases to help clients?
There are a range of behavioural biases, which fall into two main categories: cognitive (rooted in logic (albeit flawed)) and emotional (which have an irrational basis).
One example of a cognitive bias is recency bias: as some investors have experienced following the rise in cash yields, it is possible to focus on the most recently available rates (which happen to be the most attractive) – but ignore the longer returns history compared with investing in financial markets. By contrast, loss aversion is an emotional bias, whereby the loss of a certain sum is felt much more powerfully than a gain of the same value.
Our presentation explored different approaches for advisers in helping clients overcome both types of behavioural biases.
Risk-targeted investing: The WS Canlife Portfolio III-VII Funds
Of course, fund managers are also susceptible to behavioural bias. Our process-driven approach to risk-targeted investing helps to mitigate this by managing to a specified asset allocation.
Important Information
The value of investments may fall as well as rise and investors may not get back the amount invested.
The WS Canlife Portfolio Funds may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the funds. The value of the property is based on the opinion of a valuer and is therefore subjective.
This article is issued for information only by Canada Life Asset Management. This article does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available in the literature section.
Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Promotion approved 30/01/24
