Blog- Compliance is coming out of the shadows

Compliance Is Coming Out of the Shadows

The compliance function in financial services businesses is fast changing to keep up with the growing number, complexity, and variety of regulations. The key point is that if the mindset to compliance changes from a simple “tick the box” assurance process to a business advisory approach, then a more robust business will be developed with the right foundations. Put another way, a compliance function structured the right way can add significant value to the business. There is an increasing risk that without a robust compliance function there is no business. To be successful, the compliance monitoring function must be highly automated. So, there needs to be substantial investment in the technology solutions that can help monitor transactions and retain documentation. If you want to learn more, review a paper issued by the Ethical Corporation ( in January 2005 called: “Capitalizing on the New Compliance Mindset.”

What many forget is that the behavior of people drives transactions and business activity. Therefore, managing the behavior of people should be a much larger component of the compliance function rather than just a review of the paper flow. Again, such strategies can be built into the compliance systems. It is interesting that in the new era of compliance, that the more proactive firms are starting to hire behavioral finance specialists in their compliance departments.

They Holy Grail will be reached when the firms have systems for comparing the behavioral biases of a person (what they do) to what they should do. The starting point is collecting the right data about the client up-front in the client service process, including an objectively measured behavioral assessment. Without the right information being used as the foundation of a solution, it will never be suitable. Interestingly, if this upfront behavioral discovery process is handled properly, it will be very engaging for the client leading to higher revenues for the firm and reducing risk exposure of litigation.

So, a well-structured behavioral discovery process will enable both compliance and relationships to be at the core of building a client-centered business. Compliance can now come out of the shadows.

Shocking Truth About Advisors 2

The Shocking Truth about Advisors

I don’t need one. That’s what affluent millennials are saying.

Researchers at Phoenix Marketing found that just over half of the investors they spoke to (among those under 35 with $1million or more in investible assets) said they were comfortable managing their wealth with their smartphones, and nearly 60% were very comfortable managing their wealth with online tools.

They take on responsibility for themselves, because they’ve been operating that way, with access to information at their fingertips, empowered by data,” the report states. “It’s just a different mindset and that’s going to force traditional wealth management to change how they operate.

Translation: They don’t see the benefit of what advisors have to offer.

Given that 93.6% of the financial planning process is the behavioral management of the client, I must pose a question:

How will these millennials manage their own emotions and behavioral biases so as not to sabotage their financial plan?

When the market is “down”, one person’s core behavior may tell them it is a buying opportunity and the other person may be very cautious and want to sell. Which strategy is right and which is wrong? It depends on the financial personality of the individual, as well as, many other factors.

Being empowered by data is certainly important but that is only one piece of the puzzle. And we all have biases on data. So we can pick and choose what data we want to support our theories.

What if your financial advisor could know exactly how you felt in every market turn and help you maintain your financial plan based on objective data? And then give you specific action steps so that you don’t operate from your biases?

This “behavioral coaching” provided by a financial advisor adds 150 basis points a year to a client’s account value based on Vanguard Alpha Advisor Research in 2015.

Technology, behavioral discovery processes, and financial planning can be successfully integrated into wealth management. When it is done right, the shocking truth about financial advisors is that you DO need one!


Don’t Let Behavioral Biases Cost You Money!

A key principle to remember is that each client reacts differently to the same market events. This is because they each have a unique mix of behavioral biases. This begs the question, how will you manage your different clients’ emotions as the market changes?

In the financial planning process, some clients tend to make financial decisions that are based on past experiences, personal beliefs, what they like and to avoid mistakes. Fewer people make well considered forward thinking, long-term life financial planning decisions. But, each approach suggests a bias.

Writing for News Limiteds The Australian, Platinum Asset Management co-founder and managing director Kerr Neilson asks the following question.What is the biggest factor in investing? What is it that separates the winners from the losers? You might think its experience or numeracy or a particular understanding of an industry. All of these factors will be relevant, but the distinguishing feature is surely the presence of bias.

This is an interesting thought and much in evidence in the financial fraternities articles and blogs. But what is bias? How does it play into financial decisions? Can it be uncovered?

Investopedia explains ‘Bias’ as:

Some common psychological biases plaguing investors include: representative bias, cognitive dissonance, home bias, familiarity bias, mood and optimism, overconfidence bias, endowment effects, status quo bias, reference point & anchoring, law of small numbers, mental accounting, disposition effects, attachment bias, changing risk preference, media bias and internet information bias.

Can behavioral biases be uncovered?

Yes they can, because each person has an inherent hard-wired behavioral style which is the core of who they are and can be predicted with the right discovery process. Behavioral biases influence not only their behavior, but also their decision-making process. Daniel Kahneman (winner of the Nobel Prize in Economics) refers to this as a persons automatic decision-making biases in his 2012 book “Thinking, Fast and Slow”.

Robert Stammers, CFA Director, Investor Education notes in his article for Forbes – Perhaps the best advice for individual investors regarding bias is this: Avoid trying to outsmart the markets and instead work to outsmart yourself. Through self-examination and reflection, learn to recognize your own biases when they rear their heads.

Financial advisors need to be able to uncover a clients biases. Having this insight in advance of planning not only enables the advisor to educate the client, but it also flags areas where the client can be steered away from their emotional bias, which results in taking action based on feelings instead of facts.

Writing for the European Financial Review, H. Kent Baker and Victor Ricciardi observe:Investor behavior often deviates from logic and reason. Emotional processes, mental mistakes, and individual personality traits complicate investment decisions. Thus, investing is more than just analyzing numbers and making decisions to buy and sell various assets and securities. A large part of investing involves individual behavior. Ignoring or failing to grasp this concept can have a detrimental influence on portfolio performance.

A useful starting point in the advisor/client relationship is to uncover and understand that you, as an advisor, have your own investment biases and blind-spots that must be managed so that clients are not influenced by your behavior. Revealing these biases for the advisor, as well as the client, ensures a) the relationship will be built on trust and b) it will help mitigate the influence bias or predilection can have on decision making.


Does Behavioral Coaching Help?

Financial DNA Market Mood for Advisors_April 2015

The ROI of addressing the human side of wealth management has long been questioned. However, we intuitively know that behavioral management of the advisor and client is the primary driver of the end result. There is so much benefit for clients in having a financial advisor who is prepared to behaviorally coach them.

For the past 21 years Dalbar has been producing its Quantitative Analysis of Investor Behavior (QAIB) report which demonstrates that investors underperform the market by a wide margin:

  1. The average equity mutual fund investor underperformed the S&P 500 by a wide margin of 8.19%. Further, the broader market return was more than double the average equity mutual fund investors return. (13.69% vs. 5.50%).
  2. In 2014, the 20-year annualized S&P return was 9.85% while the 20-year annualized return for the average equity mutual fund investor was only 5.19%, a gap of 4.66%.

Given these gaps, it begs the question as to the role of the financial advisor as a behavioral coach to keep clients out of their own way from making sub-optimal decisions. Also, this brings up another question, why dont investors hire a financial advisor? Do they think they can do better or is it lack of trust or high fees?

The Dalbar QAIB report for 2015 confirms the Vanguard Alpha Advisor report which values behavioral coaching at 150bps per year. This is a significant ROI.

Underneath all of this, if the advisor has a practical way of holistically understanding their clients financial personality and the behavioral intelligence at their finger tips to use such insights on a real-time basis then they can easily be a behavioral coach. Have a look at the Financial DNA Market Mood Dashboard at



  • In 2014, the average equity mutual fund investor underperformed the S&P 500 by a wide margin of 8.19%. The broader market return was more than double the average equity mutual fund investors return. (13.69% vs. 5.50%).
  • In 2014, the 20-year annualized S&P return was 9.85% while the 20-year annualized return for the average equity mutual fund investor was only 5.19%, a gap of 4.66%.
  • In 2014, the average fixed income mutual fund investor underperformed the Barclays Aggregate Bond Index by a margin of 4.81%. The broader bond market returned over five times that of the average fixed income mutual fund investor. (5.97% vs. 1.16%).
  • Retention rates are

- slightly higher than the previous year for equity funds and

- increased by almost 6 months for fixed income funds after dropping by almost a year in 2013.

  • Asset allocation fund retention rates also increased to 4.78 years, reaching their highest mark since plummeting to 3.86 years in 2008. Asset allocation funds continue to be held longer than equity funds (4.19 years) or fixed income funds (2.94 years).
  • In 2014, the 20-year annualized S&P return was 9.85% while the 20-year annualized return for the average equity mutual fund investor was only 5.19%, a gap of 4.66%.
  • In 8 out of 12 months, investors guessed right about the market direction the following month.