by Dr Louis Williams, Head of Psychology and Behavioural Science

How do your clients interpret past performance? Is the information you provide valuable, or could it be leading them to make poor decisions?

Under the consumer understanding outcome of Consumer Duty, the FCA wants firms to support customers to make informed decisions by giving them the information they need, at the right time, in a way they can understand it. To support alignment with this outcome, we at Dynamic Planner wanted to find out how clients interpret the performance charts they are shown by their advisers.

Despite the requirement to include disclaimers to the contrary, research shows that past performance data is often relied on as a useful source of information for decision making1. This can lead to poor choices due to behavioural biases such as availability bias, where clients use information that comes to mind quickly, and recency bias, where clients assume that future events and trends will resemble recent experiences2.

Benchmarks are used in past performance charts to provide clients with a point of comparison, but little research has explored how these are used in making decisions, and whether they are or are not beneficial.

In collaboration with Mark Pittaccio (Quilter), Dr Eugene McSorley and Dr Rachel McCloy ( University of Reading), we conducted a research project to explore eye movements and decisions of experts and non-experts when interacting with past performance charts. A total of 60 participants took part in the study, and were categorised into three groups – students, clients, and experts – based on their background and experience.

Eye tracking technology monitors eye movements during decision-making processes, providing insight into how we process complex information before making a choice. Such techniques have been used across disciplines including sports, art, medicine and decision theory.

We used the technology to monitor the eye movements of participants while they viewed a range of charts depicting one year of hypothetical performance. Participants were fitted with an EyeLink II tracker headset, and answered questions for each graph about what they would do in the situation – would they stay invested? – and how they felt. They were also asked to estimate the maximum return and the return at the start of month nine to gauge their level of understanding.

We found that clients spent more time and made more fixations and visits to the last two months and the y-axis of performance charts than both experts and students – that is, they relied significantly more on recent performance to help with decisions.

They made even more visits to the last two months when they were provided with a benchmark, whether returns were positive or negative. The availability of a benchmark appears to be very important for clients, providing useful information on whether to remain invested and affecting their views on the future of their investments. However, paying too much attention to the benchmark and to recent performance can distort decisions.

A benchmark was helpful in reducing concerns when participants had achieved negative returns. However, if they had experienced positive returns, the inclusion of a benchmark reduced their propensity to remain invested. The presence of a benchmark also increased the complexity of the charts for non-experts, with both students and clients requiring more time to make a decision when a benchmark was shown.

Benchmarks and portfolio values are factual representations of what has actually happened, but they tend to be presented without context of the client’s own financial objectives or whether or not their financial plan is on track. This lack of context could lead to poor assumptions being made based on very recent performance.

The adviser’s skill is important to help make the information relevant to the client’s individual circumstances and help them resist the temptation to act on detrimental behavioural biases.

A personalised benchmark that demonstrates whether the client is ‘on track’ to achieve their objectives may be more appropriate than generic benchmarks. Further research can help us understand this and the effects of visual framing on clients’ interactions with past performance data.

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  1. N. Capon, G. J. Fitzsimons, & R. Alan Prince (1996). An individual level analysis of the mutual fund investment decision. Journal of financial services research, 10(1), 59-82.
  2. S. Diacon & J. Hasseldine (2007). Framing effects and risk perception: The effect of prior performance presentation format on investment fund choice. Journal of Economic Psychology, 28(1), 31-52; W. Bailey, A. Kumar & D. Ng (2011). Behavioural biases of mutual fund investors. Journal of financial economics, 102(1), 1-27.

Hear from Dr Louis Williams, Dynamic Planner’s Head of Psychology and Behavioural Insights, in candid ‘Conversation With’ Kim Dondo, of the Money Marketing Podcast. Louis talks about life before Dynamic Planner; how psychology impacts financial planning decisions, big and small, we all make; biases which creep into our decision-making process; and how weather and cash flow modelling forecasts share more common ground than you think.

[Money Marketing] What is your background Louis?

[Louis Williams] My background is in experimental psychology, different research using eye-tracking techniques, to see how people view information, for example, graphs. I began working on a joint, two-year project with the University of Reading, where I still have a visiting fellowship and Dynamic Planner, to see how we can create new tools and measurements, to understand more end clients and investors, and their behaviours. After the project ended, I joined Dynamic Planner permanently.

[Money Marketing] How does psychology play a role in shaping our financial decisions?

[Louis Williams] Many fields of psychology are relevant when it comes to shaping how clients make financial decisions, and not just important financial planning decisions, but decisions we make every day in the supermarket, for example.

One issue today is there are so many options out there when it comes to making a purchase, so much information, from so many sources – family, friends, your financial adviser, social media. We have limited time to make decisions and we are only human. We don’t have the capacity to always make the best choice, so sometimes we have to simplify the process.

For example, you’re in the supermarket and you only have a choice between two different products. In that instance you might look at all of the information available to you, like price, calories, ingredients. But if there are lots of products and you need to leave the store in two minutes, you might simply base your final decision on price, so your decision-making process changes.

Psychology, in that sense, is important for us to understand how that works, because those decisions and the shortcuts we take to sometimes make them leads to biases and ‘errors’. We make them because we’re trying to simplify the decision-making process.

[Money Marketing] What common biases today can financial planners be aware of in their clients?

[Louis Williams] Today, availability bias is important. By that we mean basing decisions on information which comes to mind quickly, or easily. Again, we can think of the example in the supermarket where you pick up a product and are instinctively shocked by its price. It’s more than you remember it being last week.

There is also recency bias, where we think what has happened recently will continue to happen in future. For example, if we make a decision on a 10, 20-year mortgage rate, based on what’s happening in the UK right now.

We can also think about anchoring bias. A client could be anchored or fixated on the value of their portfolio last year and how it is still making them feel, how optimistic they are or not, about the value of their portfolio this year.

[Money Marketing] How can behavioural insights lead to better outcomes for investors?

[Louis Williams] Before I joined Dynamic Planner, I helped run one eye-tracking study into meteorology, nothing to do with financial planning or investing. We showed people who took part graphs of weather forecasts. And what we found was that when we showed people a median line of what weather to plan for, people fixated on it, even when we asked them questions not relevant to that median line.

When we removed that line, showing them the same forecast, we found that people viewed the whole graph much more. We have applied that learning now to Dynamic Planner, in a cash flow planning forecast, which shows a median line of how they can most likely expect their portfolio to perform in future.

An adviser and their client can click on an option to reveal possible investment paths, which go into producing that median line, and enabling the client to really visualise the volatility inherent within their portfolio, and the ups and the downs when it comes to performance. It shares the story of while you may end up in a particular place, in future with your portfolio and its value, it may not necessarily be a smooth path or journey to get there. These types of techniques and experiments can be applied in financial services, even when initial studies and findings had nothing to do with the field. We can still learn.

Hear more from Louis Williams, Dynamic Planner’s Head of Psychology and Behavioural Insights in the Money Marketing Podcast.


Dynamic Planner, the UK’s leading risk-based wealth planning and financial advice system, is set to launch a Financial Wellbeing Questionnaire on Friday 16th June. It has been designed to enable advisers to identify vulnerability characteristics in line with Consumer Duty.

Its development and creation has been led by Dynamic Planner’s Head of Psychology and Behavioural Insights, Dr Louis Williams, in collaboration with Dynamic Planner’s fund research team and academics from Henley Business School, part of the University of Reading.

The launch forms part of Dynamic Planner’s long-term commitment to helping investors better understand their financial situation and is an integral addition to Dynamic Planner’s suite of investor profiling questionnaires. Advice firms can now assess a client’s risk appetite, sustainability preferences and vulnerability characteristics in one place.

Aligned with key questions and the algorithm of the FCA’s Financial Lives Survey completed by 22,000 people, Dynamic Planner’s Financial Wellbeing Questionnaire has been rigorously tested with over 1,000 UK investors, providing the means to understand a client’s individual differences and needs. Incorporating all elements to support the four key drivers of vulnerability as set out by the FCA, it meets the requirements of Consumer Duty to identify vulnerabilities and those who are susceptible to harm, so that appropriate support can be provided.

Louis Williams, Head of Psychology & Behavioural Insights at Dynamic Planner said: “With the first deadline for Consumer Duty imminent, the launch of our Financial Wellbeing Questionnaire powers the identification of vulnerabilities with technology, enabling financial advisers to assess individual clients across four key areas: health, life events, resilience, and capability.

“Aligned with the FCA’s Financial Lives Survey and designed in collaboration with academics from Henley Business School, it provides advisers with a solution to the call to action set out by Consumer Duty to assess a client’s vulnerability characteristics.

“We are committed to supporting advice firms in helping their clients better understand their financial situation and choose investments that are suitable to fund the life they want. The Financial Wellbeing Questionnaire is another example of us delivering on that commitment.”

Financial advisers using the Financial Wellbeing Questionnaire with their clients will receive a report for their Consumer Duty record which highlights areas of vulnerability. The report includes insights and tips to help with life’s challenges to share with the client and aims to encourage higher levels of resilience so that a client’s level of financial self-efficacy and wellbeing increase.

Using Dynamic Planner’s Financial Wellbeing Questionnaire with Clients

Financial wellbeing results indicating the level of vulnerability for each of the four drivers

Not a Dynamic Planner user? Schedule a free no-obligation demo with a business consultant and experience the full functionality of Dynamic Planner.

The news from the Office of National Statistics (ONS) that inflation has eased slightly from its 41 year high at 11.1% to 10.7%, will provide a little hope but not quite enough to eradicate the worry that people feel for the immediate future and their financial position.

For those already struggling to cope with the rising cost of living, this will only compound the situation. For people fortunate enough to have investments, some may need to make decisions about how to plan to support the increasing cost of living. For many, a better understanding of cognitive and emotional biases could help.

Unfortunately, as humans, we have limitations on our abilities to process all the necessary information when making a decision in order to make the most rational choice, particularly as we are often bombarded with a wealth of information and have time constraints in which to make decisions. So, when it becomes challenging to keep track of the ever-changing prices of goods, interest rates, and trends in inflation, then we can often make shortcuts in our thinking to simplify the decision-making process, but this can lead us to make errors.

Dynamic Planner outlines below well-known biases that are particularly fuelled by the news of high inflation, along with ways to reduce or avoid them:

  1. Framing effect– this refers to how information is presented. People rely too much on the way a message is framed which can affect how they interpret information and therefore act on it.
    How to avoid: Try to reframe a problem or message and find alternative perspectives. Research also shows that those who are more knowledgeable and up-to-date on an issue are less susceptible to the framing bias and the way a message is portrayed. It is therefore important to discuss inflation and its impact with an expert or read the financial sections in newspapers and online to help understanding.
  2. Anchoring bias– During uncertain times decisions can be influenced by fixating on a reference point or information you have received. People may make comparisons, estimates and decisions in relation to this reference, which is known as anchoring, ignoring other relevant information.
    How to avoid: Research shows that just the way in which information is presented can cause people to look at a reference point and ignore all other relevant information. Even though a reference point, whether one you have determined or have observed in the media, may seem important, don’t be fixated on a figure, they are often arbitrary and irrelevant, and can cause greater worry.
  3. Regret aversion– Anticipating regret and envisioning the emotional discomfort of making a poor decision can result in inertia, where people may fail to act or stick with a default option for fear of making an active choice which later turns out to be sub-optimal.
    How to avoid: Not making or avoiding a decision still involves making a choice. Research found that automatic pension enrolment increased pension participant rates from 49% to 86% in 2001, and this is why such behavioural nudges (an opt-out rather than an opt-in system) have been applied today, helping us to save more for the future. Spend time thinking about your priorities and viewing the future with optimism, finding ways to better regulate your emotions can also help reduce fear and succumbing to feelings of regret when facing a difficult decision.
  4. Present bias– Individuals can have the tendency to pursue instant gratification by overvaluing present rewards at the expense of future returns. We often engage in impulsive behaviour in return for immediate pleasure, whether opting for unhealthy fast food or spending money today rather than saving for tomorrow.
    How to avoid: It is important to delay gratification particularly when we consider saving for retirement, immediate rewards can often lead to regret. When saving, set realistic goals as setting yourself up for failure can reinforce the desire to accept instant rewards and discourage you from persevering and saving for the future.
  5. Availability bias – refers to our tendency to use readily available information, information that comes to mind quickly and easily when making decisions. We also often evaluate the likelihood of future events on recent memories without putting them in perspective of the longer-term past which can lead us to make poor financial choices.
    How to avoid: Perceptions of inflation can be heavily influenced by your personal purchasing experiences. Research shows that price changes of items that were recently purchased, bought frequently, resulted in an increase in price, and particularly a large increase, influenced people’s perceptions of inflation. Gain a more accurate and objective picture of inflation and discuss with an expert or research the current situation, as recent events and personal experiences can cloud your judgement and lead to greater worries.

Louis Williams, Dynamic Planner’s Head of Psychology & Behavioural Insights said: “The current situation is worrying for everyone, some of us will not have experienced inflation anywhere near as high in our lifetime.

“For those who are fortunate to still have a degree of choice in how to manage their money, understanding the biases that may influence their attitudes and behaviour could help them achieve better longer-term outcomes as well as counter some of the impact of inflation.

“Having a much deeper understanding of our susceptibilities to behavioural biases can be a great help in overcoming rash or ill-thought-out decision making, especially when faced with all the uncertainty we have right now combined with the soaring cost of living.”

By Chris Jones, first published in April 2021

If you lived and worked on an isolated island community, and you were able to source everything you needed from your fellow islanders, retirement would be a relatively simple thing to plan.

You would earn a wage or make a profit doing your thing. You would not only spend your income on your fellow islanders’ goods and services, but you could also invest whatever you had left over in their businesses. When you retired, your share of the profits in those business would be directly correlated to the cost of the goods and services, and everyone is happy.

You could, of course, lend money to these businesses instead but there would be no certainty that the fixed capital repayment or interest would be correlated to the cost of goods in the future. This inflation risk is why asset-backed and equity in particular are so good for retirement planning. We may not have felt it recently, but inflation does creep up on you over time.

In either case there are other risks: the business might go bust, the owner may not honour the agreement and so forth. These are things that apply to both the loan and the equity.

I am imagining my theoretical example set in the 18th or 19th century: a blacksmith, baker, farmer, publican, tailor, doctor etc. Since then, advancements in transportation, industrialisation, and communications have led to globalisation which brings improvements and challenges to this premise.

Reducing risk through diversification

Over the last generation, people have been able to invest in Mitsubishi, Nestle, Total, Tesco, BP, Diageo, M&S, GSK etc. Clearly being able to do this reduces risk through diversification and a fair and efficient market. It does introduce additional market and currency risks, but nonetheless people can easily invest in the companies that supply them and this is sensible and encouraging. I understand that the reason funds tend to show top 10 holdings is mainly because investors feel reassured by this.

If globalisation impinges on our remote island scenario, had you invested in your local small business supplier, would it have been acquired and integrated into a global company, or would it have just gone? Whilst investing in equities for long term future retirement needs is compelling, the question of which share is important.

At Dynamic Planner when we use phrases like U.K. Large Cap Equity or Short-term Bonds it has a very specific meaning. For these examples, it is the MSCI UK Equity Large Cap Total Return Index and ICE BofA 1-5 Year Sterling Corporate Index. Individual funds or stocks and shares vary from that both in performance and in risk characteristics, as we can all easily observe. We of course calculate and measure this variance and use it when we risk profile funds at a holdings level.

Expected real returns

Whilst indices are great for consistency of term and qualitative analysis, their components are very fluid and they are totally ex-post (or after the event) in nature. When a share grows, it enters or forms a larger part of that index; that doesn’t mean that it will stay there or remain at that proportion of the index.

Our service provides ex-ante, expected real returns; volatility, correlations and covariances as well as a Monte-Carlo stochastic forecaster. What we cannot do is tell you what stock will make up an index in 30 years’ time. If we could, I would be living on my own private island right now. When you think about asset manager charges, caps and their value, it’s worth reflecting on how difficult yet worthwhile it is for them to try to do this on your behalf.

Whose labour, goods and services will be needed when you retire?

The companies that make up local indices and the countries that represent a global index change quite dramatically. At the end of the 19th century commodities and the UK were dominant.

By 1967 the largest companies in the US were GM, Exon, Ford, GE, Mobil, Chrysler, US Steel and Texaco -almost all car related. At the same time, the UK was busy devaluing its currency and voting not to allow women into the London Stock Exchange. Back then half of UK shares were directly owned by individuals, so in many ways the market was closer to my imagined island scenario than the globalised fund-led market of the 21st century.

Change in relative stock market size from 1899 to 2021.

Things change. Would anybody like to be living off Kodak, Blockbuster or even Tie Rack shares today?

Whilst the basic principle of exchanging your labour for capital whilst you work, and then exchanging your stored capital for labour when you can’t, has been consistent and remains valid today, when it comes to choosing where to store your capital the fundamental question remains: whose labour, goods and services will be needed when you retire?

There has been a lot written about ESG and sustainability. Everyone has an opinion and many people have suddenly become experts. I am certainly not an expert and I won’t add my opinions to the pile.

It does, however, appear sensible to invest in companies that will still be around in the future, and it might be that use of the word ‘sustainability’ is all you need to prompt you to consider ESG information and your client’s preferences. A psychometric sustainability questionnaire and objective MSCI ESG data is available in our system.

Not yet a Dynamic Planner user? Schedule a free no-obligation demo with a business consultant and experience the full functionality of Dynamic Planner.

Dynamic Planner’s Head of Psychology & Behavioural Insights Louis Williams, has been named as one of the eight Knowledge Transfer Partnership (KTP) Awards’ Future Leader for 2021 Winners.

Louis has worked with Dynamic Planner for two years, spearheading a cutting-edge behavioural science and investment initiative with Henley Business School, an alliance formed via the Government-backed KTP programme. The awards celebrate the best of KTP’s three-way partnerships between business, academic/research teams and qualified graduates, designed to drive innovation for UK businesses and organisations.

Louis Williams, Head of Psychology & Behavioural Insights at Dynamic Planner said: “I am delighted to be named as one of the Future Leaders recognised at this year’s awards. The study of investor behaviour is fascinating and the potential it offers to improve financial outcomes for investors is limitless. We have used our behavioural studies to further enhance how we help advisers assess client investment risk and more recently to help people invest sustainably. I look forward to continuing to apply my academic and professional background as a psychologist to inform what we offer as Dynamic Planner.”

Gerry O’Hagan, Knowledge Transfer Adviser, KTN said: “The project between Dynamic Planner and Henley Business School is a great example of the dynamic collaboration that lies at the heart of the KTP programme. Louis is a highly talented Future Leader, and the new insights that he was able to generate have enabled the company to introduce new products for their key customers, Independent Financial Advisers (IFA’s) and Fund Managers.”

By Louis Williams, Head of Psychology & Behavioural Insights

Advice firms aim to optimise their clients’ investment returns. But the potential impact sustainable investing can have can be misjudged, alongside the importance clients place on returns and their sustainability preferences.

As sustainable investing, as a subject, considers managing risk, doing well by doing good, reduced financial opportunities, potential for lower returns, and emotional and ethical motivations, conversations pivot on a clear understanding of someone’s goals.

Designing a measure to effectively understand clients’ sustainability preferences, covering such a broad acknowledged area is therefore crucial.

How are a client’s sustainability preferences currently captured?

To date, emphasis has been placed on understanding the impact companies have concerning environmental, social and governance [ESG] issues. However, few advances have been made to create a true process where a client’s sustainability preferences are accurately captured.

Multiple choice questions, using mock scenarios, are one path being explored, allowing a client to select preferred investments after being provided with information about their sustainability and returns. There are advantages to this approach as it removes a very direct line of questioning which can potentially invite a respondent’s biases into the equation. However, such an approach also has disadvantages.

First, hypothetical scenarios are not indicative of decisions made in reality. Second, the fund universe and dynamics within an investment portfolio reach far beyond what can be encompassed by a simple multiple-choice task.

Third, it is incorrect arguably to situate ‘sustainability’ at one end of a spectrum and ‘investment returns’ at the other, when sustainable investments can generate greater returns.

Fourth, multiple choice questions and mock scenarios demand a client has prior financial and mathematical knowledge, which they may not. Finally, fifth, a client’s responses may be distorted in a mock scenario – for instance – involving a company they have a view on.

Why adopt a psychometric questionnaire here?

It is not useful to view sustainable investing as simply a box ticking exercise. Nor is it helpful to overwhelm a client with information available.

To understand a client’s preferences the key is real engagement, so their preferences can be captured and also the implications of their choices can be discussed. Sustainable investing preferences, as we have noted, can be complex, encompassing a broad church of relevant factors. Therefore, a suitable step in your firm’s process is required to serve as a trusted foundation for a conversation with a client.

Psychometrics combines thinking from the schools of psychology and statistics. A psychometric questionnaire therefore is created to cut through the noise of, as we have noted, direct questioning to effectively understand how someone might feel and act both in the short and long-term.

While there is no history or track record of psychometric ESG questionnaires, at Dynamic Planner, we are fortunate that our team have the experience of successfully creating the most popular and most proven risk profiling questionnaire in the UK, supporting more than one million clients of advice firms since 2013.

At the beginning of 2018, we launched in Dynamic Planner a new psychometric attitude to risk questionnaire, which again has proved hugely popular with advice firms and, in the last 12 months, during the Covid-19 crisis, has stood up robustly when continuing to measure a client’s attitudes to investment risk.

We have followed a similar formula now to build and release a psychometric questionnaire to capture a client’s sustainable investing preferences, ensuring it is reliable, valid and that it measures what it intends to.

How did we build our sustainability questionnaire?

There are a number of key things to consider when designing a psychometric questionnaire. They are:

  1. Avoid complex terminology or jargon
  2. No financial knowledge needed for completion
  3. Avoid repetition or redundant questions
  4. Capture multiple dimensions of what is being measured
  5. Avoid double-barrelled or ambiguous questions
  6. Employ an appropriate number of questions
  7. Choose an appropriate question order

That all said, even when questions are clear and well supported by academic thinking, a questionnaire can still fail to capture what it intends to. Clear, statistical steps must be taken to validate a questionnaire.

At Dynamic Planner, we tested our psychometric sustainability questionnaire on more than 1,000 UK investors, alongside taking significant steps before reaching a robust, final version. We also consulted with focus groups of advisers.

What does our questionnaire measure?

#1 Psychological distance
People are more likely to take greater risk regarding decisions which impact far in the future. If we consider the example of climate change, acting now may feel unattractive given that the promise of reward appears distant and uncertain.
An individual may acknowledge the importance of sustainable investing, but when considering benefits are largely for future generations, this can impact their decision in the short-term. Psychological distance measures this balance.

#2 Personal values
It can be assumed that a client’s sole desire is to maximise their wealth. However, they can also be motivated to promote social change, consistent with personal values and therefore be willing to accept lower returns.
It is important to understand an individual’s views on controversial or unsustainable areas of investment and how far their portfolio should reflect their values and beliefs.

#3 Emotional benefit
It is important to measure the emotional benefits of investing. People can benefit emotionally when they believe they have acted responsibly through their investments and can feel compensated if they receive lower returns, as a result.
Emotions are important when making financial decisions and taking risk. People who are positive can be more risk seeking, while decisions around sustainable investing can, as we have noted, evoke positive emotions. It is therefore important to understand a client’s positive or negative emotions towards how companies manage ESG risks.

#4 Positive impact
We know a proportion of investors express a desire to do good with their investments, producing social and / or environmental benefits. This extends beyond a company simply monitoring or managing ESG risks. Such individuals are socially motivated.
They may be prepared to accept lower returns in order to achieve their goals, whether it is their own investments directly having a positive impact, or whether they are contributing more broadly to change in investing. It is important to identify how a client seeks to actively engage with companies to generate positive and measurable social and environmental impact, alongside financial returns.

#5 Financial considerations
Although investors may display preferences for sustainable investing, there are trade-offs that they should be aware of. Studies have shown that ESG investments can produce at least competitive returns. Nevertheless, it is important to understand how a client prioritises investment opportunities and financial returns in relation to sustainability preferences.

How can Dynamic Planner help your firm regarding sustainable investing? Find out at one of three webinars from 8-10 June

Dynamic Planner is set to launch the industry’s first psychometric Sustainable Investing questionnaire. Launching on 7th May to all advice firms and clients using Dynamic Planner, the ESG investing questionnaire provides a simple, yet academically robust solution to the challenges advisers face when talking to their clients about environmental, social and governance (ESG) factors and sustainability.

The development of the questionnaire has been led by Louis Williams PhD FHEA, Dynamic Planner’s Head of Psychology and Behavioural Insights. It has been designed in consultation with focus groups of advisers and tested by 1000 investors. Its key aim is to provide advisers with a robust and repeatable process to hold sustainability discussions with clients, by accurately capturing an individual’s ESG preferences.

Louis Williams, Head of Psychology and Behavioural Insights at Dynamic Planner said:

“Sustainable investing is not a straightforward tick box exercise. Preferences can be complex, encompassing an incredibly broad range of factors. Expectations of the impact it can have can be misjudged, along with the importance and balance clients place on potential returns and their sustainability preferences. The key to fully understanding the ESG and sustainability hopes and expectations of a client is real engagement, so that their preferences can be accurately captured and the implications of their choices discussed.

“Until now, emphasis has been placed on understanding the impact companies have concerning ESG but few advances have been made to create a process which truly helps clients to understand the whole picture. Bringing together psychology and statistics in the form of our Sustainable Investing questionnaire enables us to help advisers cut through the noise and really understand how someone might feel and act both in the short and long-term. Successful investment and sustainability conversations pivot on a clear understanding of someone’s goals.”

The Sustainability Investing questionnaire will be used alongside Dynamic Planner’s Sustainable Investing insight, launched in February. It has been designed with the client in mind, to avoid jargon and complex terminology; no financial knowledge is needed to answer questions; it employs an appropriate number of questions in an appropriate order; all of this based on feedback and insight provided through testing and consultation with investors and advisers.

Ben Goss, CEO at Dynamic Planner said:

“Our psychometric Sustainable Investing questionnaire is an industry first, built on a combination of the robust academic thinking of schools of psychology and statistics. And importantly, in tandem with investors and advisers.

“Our team has the experience of successfully creating a risk profiling questionnaire that has supported more than one million clients of advice firms since 2013. What we are launching now is built on a similar formula, to capture a client’s sustainable investing preferences – an extension of our suitability process with the extra ‘s’ of sustainability.

“Combined with our Sustainable Investing insight launched earlier this year, we will be able to help advice firms deliver more deeply valuable and bespoke financial plans in line with clients ESG preferences.”

The Dynamic Planner Sustainable Investing questionnaire measures:

  1. Psychological distance: People are more likely to take greater risk regarding decisions which impact far in the future. An individual may acknowledge the importance of sustainable investing, but when considering how future generations or people elsewhere may benefit, this can impact their decision in the short-term.
  2. Personal values: It can be assumed that a client’s sole desire is to maximise their wealth. However, they can also be motivated to promote social change, consistent with personal values and therefore be willing to accept lower returns.
  3. Emotional benefit: It is important to measure the emotional benefits of investing. People can benefit emotionally when they believe they have acted responsibly through their investments and can feel compensated even if they receive different risk/reward outcomes, as a result.
  4. Positive impact: We know a proportion of investors express a desire to do good with their investments, producing social and / or environmental benefits. This extends beyond a company simply monitoring or managing ESG risks. Such individuals are socially motivated. They may be prepared to accept lower returns in order to achieve their goals.
  5. Financial considerations: Although investors may display preferences for sustainable investing, there are trade-offs that they should be aware of. Studies have shown that ESG investments can produce at least competitive returns. Nevertheless, it is important to understand how a client prioritises investment opportunities and financial returns in relation to sustainability preferences.

Dynamic Planner Sustainable Investing insight and the newly launched questionnaire will enable advisers to respond to increasing demand to talk about sustainability, ensure their clients fully understand both the ESG and sustainability opportunities and risk that their investments present, as well as helping to support advisers in fully meeting the fast-evolving regulatory requirements.

Dynamic Planner is running three Sustainable Investing Webinars from 8th-10th June. Visit the training academy page to find out more.

A schooling in psychology drives LOUIS WILLIAMS – Head of Psychology & Behavioural Insights at Dynamic Planner – to question what we know about your clients, people who invest. By learning more, he believes we can help them weather financial crises better in future

We know, according to research, that someone’s emotional state can strongly influence financial decisions they make. I want to explore how individual differences make investors more susceptible to either positive or negative emotions.

In that light, I have been looking closely at an individual’s emotional resilience or stability and their subsequent ability or strategy for regulating their emotions during difficult market periods.

Mind the behaviour gap

We might find that an individual or client has an attitude behaviour gap, whereby they are broadly risk tolerant, but during difficult market periods they are prone to panic and disinvesting from their current position. That gap manifests when risk becomes reality and they experience actual losses in their portfolio.

Ultimately, what I am trying to do, through my work at Dynamic Planner, is reduce this potential gap.

To do this, I have taken a step back and looked at psychology theory from the 1980s and ‘90s. For example, the theory of planned behaviour first proposed by Icek Ajzen in 1985, which shows how our attitudes influence our behaviour. Alongside that, all of us are also impacted by social pressure from family and friends or, in this context, from a financial adviser. Does such pressure lead us to behave in a certain way or not?

We can further consider what is called perceived behavioural control – an individual’s self-efficacy – or, in more layman terms, our ability to believe in ourselves in different situations. Does an individual feel confident managing their finances? The answer to that question of course can impact actual behaviour.

For example, if an individual has very low confidence in their ability to manage their finances, they may not act at all in a given situation or act contrary to what would be expected by an adviser in respect of their agreed attitude to risk.

In another way, we can look at this using the example of someone trying to quit smoking. They may know it’s an expensive habit and one they don’t enjoy anymore. Social and peer pressure comes into play here too. However, if an individual has very low belief in their ability to successfully quit, that then can significantly influence how someone will ultimately behave and in this example whether or not they actually stop smoking.

Confidence is key for your clients

Studies already completed have looked at financial self-efficacy and they revealed that people with low levels of this were most negatively affected during extreme periods of market volatility. That is what we might expect.

Having confidence in our ability, in all area of our lives, can make us more resilient when we face adversity, thereby allowing us to better manage stress and our emotions. Naturally, in this context, financial advice firms want to have resilient clients.

When I first began working with Dynamic Planner, in autumn 2019, I discovered that while psychology has broader measures of an individual’s resilience, there is no explicit measure of an individual’s financial resilience. That’s important. We arguably need one, because measuring resilience can be very domain specific. For example, my resilience regarding a health issue could be very different in comparison to my resilience regarding my finances.

What is resilience?

It is of course our ability to bounce back following a difficult period, but it also reveals our ability to adapt in the face of adversity.

In 2019, the French professor Dr Fanny Salignac created a model which looked at financial resilience and identified four key influences: an individual’s economic resources, their social connections, support network and lastly, financial knowledge. I would argue Salignac’s model fails to encompass an individual’s personality traits and qualities. Indeed, their experimental results show that optimism was a good indicator of whether someone would be financially resilient, yet was not used to inform their financial resilience model.

I have conducted some research myself to explore this issue by using hypothetical scenarios to test someone’s financial resilience. Serendipitously, after I had begun this research, we experienced a real-life market crash in February 2020 at the beginning of the Covid-19 crisis. I was therefore further able to look at results of people who completed the survey before February and or after. I also wanted to study the benefits potentially of an individual having worked with a financial adviser previously.

2020 Dynamic Planner study

The survey questioned different things. For example, we asked someone what their response would be to their portfolio suddenly falling in value by 20%. We also asked them how they would feel in that scenario.

Broadly speaking, we found that people who had worked previously with a financial adviser were more comfortable with taking risk. Interestingly, this group was also generally more resilient. Demographic variables – for example, males, who have been found historically to be more comfortable with risk – could in part explain such results, but when we controlled such variables more tightly, these trends were still apparent.

When it came to studying the results of people surveyed before the real-life crash in February and afterwards, we found that people afterwards experienced more negative emotions, like distress, anxiety and guilt. Those people also had lower levels of financial self-efficacy.

Again, people who had previously worked with a financial adviser were more optimistic and less concerned about the hypothetical scenarios, than those who had not. Interestingly, we also found that of the people who had worked previously with a financial adviser – who completed the survey both before and after February – the post-February group were most optimistic, suggesting that after experiencing the ‘real life’ adversity of last year’s crash, that core message from their adviser of staying invested resonated more strongly during the hypothetical scenarios.

Regarding low levels of financial self-efficacy, someone worrying about running out of money in retirement, for example, can be a good predictor of negative reactions to periods of adversity. In contrast, individuals with high levels of financial self-efficacy are more likely to be resilient, optimistic and to stay invested.

When it comes to personality traits, introverts, for example, are more likely to disinvest during a difficult period and are more susceptible to herding behaviour, following the crowd. Individuals with less emotional stability are more likely to base decisions on much more recent events or experiences, or are more likely to avoid reaching a decision altogether.

How can we improve clients’ financial self-efficacy?

First, set realistic goals with a client and start by working with them on smaller tasks. For example, cash flow planning may be useful to help clients achieve modest successes and therefore feel more confident when it comes to tackling the bigger picture regarding their overall finances.

Second, as their adviser, you can celebrate these successes and thereby help build a client’s confidence, like a coach. The relationship here and trust within it naturally is key. A client may well look to their adviser as a financial role model. Communication is crucial, with the adviser providing relevant information and collateral for their client to read and engage with; and they can speak regularly with their client.

Finally, an adviser can consider their client’s emotions and help decide when they are best suited, or ill-suited, to make an important decision. Can a client be encouraged to reappraise their position more positively, if they are experiencing negative emotions?

Ultimately, the end goal is a confident client and a resilient one in terms of managing their finances.

“Using Dynamic Planner Cash flow, you don’t just have to tell a client why you think something’s not a good idea – you can show them.” What does one firm think?

Louis Williams – Head of Psychology & Behavioural Insights at Dynamic Planner – analyses the risk profiling process, from start to finish, for your clients. He considers: why are risk profiling questionnaires psychometric? What does psychometric mean?

What are the alternatives for financial advice firms? What are the pitfalls to avoid? And how did Dynamic Planner and Henley Business School successfully navigate those dangers when they created their attitude to risk questionnaire? You can also view our recorded webinar where Louis discusses this, “Why use psychometric risk profiling anyway?” here.

Why do financial advice firms risk profile clients?

First, FCA rules state that firms must and are obliged to understand more about their clients’ investment objectives and risk tolerance, so that they can make them the most suitable recommendations, based on that understanding.

This understanding enables advisers to help the client achieve their objectives and, vice-versa, it helps the client understand the financial planning and advice process more clearly and brings them more into that process. That, in turn, deepens the relationship between the adviser and the client and facilitates fruitful conversations here.

How do advice firms risk profile clients?

The most common approach currently is by a risk questionnaire and ultimately matching clients with investments based upon an agreed risk profile. Clients complete questionnaires, each answer within the questionnaire is scored and those scores are aggregated, resulting in a final score from one to 10, for example, where one represents the lowest level for risk tolerance and 10 the highest level.

Why are risk questionnaires psychometric? And what does psychometric mean?

It is easy to think it is simply about the end product, so to speak, and the measurement of someone’s personality or attitude. But psychometric is also about the process of creating a tool to measure someone in this way. How does the tool interpret and achieve that final measure? Psychometrics therefore are about understanding the tool itself and testing if it is valid and reliable.

Attitude to risk is often stated as a psychological trait, but I would argue it is more complex than that.

If the former were true, our attitude to risk would be identical in different scenarios – for example, by taking a ride on a rollercoaster. But in that example I know my attitude to risk is very different compared to my attitude to risk concerning my finances. Therefore, attitude to risk is not that simple and as a result, we need to ensure that we create a tool for measuring what we want it to measure: specifically, someone’s attitude to risk concerning their pensions and investments.

Are there alternatives to risk questionnaires?

There are other methods which purport to be more objective than risk questionnaires, because, for example, they are founded on measuring someone’s experience or past behaviour in this context. But that doesn’t necessarily mean they are more valid.

One alternative is the Multiple Price List method, where clients are given choices and they make decisions until a tipping point is reached regarding their risk tolerance.

This method can be problematic because of something called extreme aversion bias, where the client continually opts for the safe, middle option. One example here might be going to the cinema and choosing a regular bucket of popcorn, avoiding choosing the small or large bucket. In that way, the client here is not fully considering the consequences of their choices. It could also be argued that the Multiple Price List method does not measure a client’s capacity for risk.

Are there other alternatives to consider?

Yes. One is a financial anamnesis, similar to how a doctor would look at a patient’s background and family history to discover more about them. But of course, this method can be unreliable when the aim is to understand more about the individual client, not their family or any stereotypes.

We can, of course, look at the individual’s investment experience, and Dynamic Planner’s risk questionnaires do consider this as part of a complete, holistic approach. On its own, though, this has problems, because what if the individual has never invested before?

A final alternative we can consider for the moment is a goals-based method – a top-down approach which looks at the risk required to ultimately achieve the returns a client desires to reach their final investment objective. But this avoids a conversation about an individual’s attitude to risk and is again arguably incomplete.

Do psychometric questionnaires have limitations?

In short, yes. A client’s answers can be flawed, but that then can fall back to the adviser to ensure that the client is fully engaged with and fully understands the process and questions.

On another side of the coin, we can acknowledge that the tool itself we are using has flaws, which is what happened in 2017 when Dynamic Planner first partnered with the University of Reading and Henley Business School to create a new and better tool here – a tool which was not only arguably better, but had purpose, as we have seen, behind the design.

What are the potential pitfalls to using a psychometric questionnaire?

How can you combat any questionnaire flaws?

First, we need to think about the questions themselves and how they are constructed. Are they open or closed questions, for example? Further, what does each question measure and how do we measure someone’s response? What different options or rankings do we give an individual for their response?

We also need to think about the number of questions we include and reach a balance, between a suitably holistic understanding of a client’s complete attitude and emotions, but avoiding fatigue setting in when someone is completing the questionnaire.

Furthermore, what is arguably vital is striking a balance between using the same response options for questions and the direction of phrasing in each question.

It is usual to have responses ranging from ‘strongly agree’ to ‘strongly disagree’ throughout. However, are questions phrased in different directions, so it effectively engages the client and avoids encouraging an individual to disengage and click ‘strongly agree’ each time?

The questions themselves must be direct and tailored to measure someone’s risk tolerance regarding their finances. However, we need to be careful that they are not so specific that they question the individual about actual investment choices, like the Multiple Price List method. Therefore, we need to avoid hypothetical questions, any ambiguity and also double-barrelled questions, which demand the client tries to answer two questions in one, which of course could prove very problematic.

Once we have our final set of questions, we of course have to test it, which was something Henley Business School and Dynamic Planner realised was vital when they designed their risk questionnaire in 2017 before its launch in early 2018.

To test it, we can use pilot studies and / or focus groups to discover potential flaws in the questions; examine their validity; and also consider any ethical issues perhaps not previously considered.

We can also test engagement here. How long does it typically take a respondent to complete the questionnaire? Are they just ‘straight lining’ and clicking the middle option, as we have seen, for each answer? We can also gauge if questions are eliciting an appropriate range of responses – and if people understand questions and are therefore answering them how we would want.

After initial testing, it is then possible to compile all your pilot data and run analyses to highlight if any questions are effectively redundant or if there are inconsistencies in what we, holistically, are asking respondents. Does that make our question set weaker, as a whole?

How did Dynamic Planner and Henley Business School create its risk questionnaire in 2017?

First, as we have seen, they asked, ‘What are we measuring here?’ Answer: attitude to risk, which they broke down into three elements based on academic theory – attitude to risk concerning financial gains which can be made, concerning losses and concerning the context in which a decision is made. How do those different components frame someone’s attitude to risk?

They therefore considered what are termed drivers, constrainers and enablers in relation to an individual’s motivation to either take risk or feel inhibited when taking risk.

Henley Business School and Dynamic Planner also considered different types of attitude structures and how an individual adopts them to evaluate a product or a concept. What are attitudes based on – logic, emotions or on observations or interactions they have experienced?

The final questionnaire created in 2017 encompasses all these multiple dimensions regarding an individual’s attitude to risk. It was then robustly tested using a large population set. Focus groups were also used to help test what advice firms and their clients see when they begin the risk profiling process in Dynamic Planner today.

Hear more from Louis Williams, Head of Psychology & Behavioural Insights, in this webinar recording: “why use psychometric risk profiling anyway”.

If you are not already a Dynamic Planner user – and would like to find out more about how we can help you and your firm – please get in touch.