In just five years, Barclays Wealth has reinvented itself. Net income has increased since 2005 from £911 million that year to £1.3 billion for the first three quarters of 2011. This 2011 performance puts Barclays Wealth in the top quartile of its peers based on year-on-year revenue growth.
In an industry that is dominated by private banks that have been around for decades – in some cases, centuries – differentiation is key for a new entrant.
In 2006, Barclays Wealth began introducing behavioural finance as part of its portfolio construction. Later that year, it started developing a financial personality assessment to gauge how the clients would respond to movements in their portfolio and therefore enable its advisors to prevent those ‘buy at the top, sell at the bottom’ reactions.
It sounds like a gimmick, but Barclays Wealth has pulled apart 40 years of analysis of behavioural finance in its bid to better ensure its clients are in the correct portfolios.
“Academic behavioural finance looks for evidence of emotional trading and where biases emerge on average,” says Daniel Egan, head of behavioural finance, Americas at Barclays Wealth. “That evidence suggests 1.2% is lost a year due to emotional reactions and cognitive biases. We’ve tried to refine that analysis and identify what the individual client might lose, rather than the average – that could be as much 7%.”
Egan says the firm looked at all the industry and academic questionnaires that seek to identify where behaviour could impact a portfolio.
“We came up with 500 candidate questions, and we ran surveys in Hong Kong, Dubai, India, East Asia, the UK and the US until we found what the exact dimensions driving the behaviour of clients were, and managed to condense that to the current survey,” says Egan. “It’s about discovering how a client trades off risk and return. Whether they enjoy that level? How composed are they? How engaged do they want to be? How confident in their choices are they? What level of engagement do they want? Do they believe in investment skill?”
For the full story, check out the February edition of the magazine.
