Head of TD Wealth explains how 'wealth personality' framework for clients shaped advisors' response to COVID-19 downturn
The wild COVID-19-driven moves in financial markets during the first quarter were arguably the most intense stress test investors have faced in the past decade, creating prime conditions for them to make the worst emotional decisions. But within the ranks of TD Wealth, advisors were well equipped to provide the appropriate support to their clients thanks to an approach that goes beyond the usual know-your-client process.
“It’s focused on behavioural science, and we really narrow it down to investor psychology,” said Dave Kelly, senior vice president and head of Private Wealth Management and Financial Planning at TD. “What we’re trying to do is give clients a window into how they make financial and investing decisions.”
Honed through a collaboration with the University of Toronto’s Behavioural Economics in Action at Rotman (BEAR) research centre, TD Wealth has been implementing a “wealth personality” assessment for its clients. Specifically, it uses the Five-Factor model of personality to determine the characteristics that drive clients’ decisions, as well as how they could respond to external factors and stressors.
According to Kelly, clients are assessed based on how they map along five personality dimensions: conscientiousness, or their tendency to take a long-term view; agreeableness, the extent to which they are trusting; reactiveness, the degree to which they’re affected by external emotional stressors; extroversion, which affects how much they connect and speak with others as they make decisions; and openness to experience, or how willing they are to try new things as they pursue their goals.
“We use those five factors to help clients better understand what motivates them, what kinds of things influence their decisions, and the types of financial blind spots they might have,” he said.
Among the different behavioural pitfalls that clients and investors may fall prey to, Kelly named four significant ones. The first, loss aversion, is based on how people’s negative reactions to losing outweigh their positive reactions to winning. That means in a market that’s off by 30%, they’re more likely to make emotional decisions that are not in their best interest for the long term.
The next one, herding, arises when people are inundated with information as they make a decision. When there are too many factors to process, the temptation to default to simplicity grows exponentially stronger, which usually means going along with what the majority of other investors are doing.
“Recency bias is another one, and I think we really saw this line in COVID because there were such wild swings,” Kelly said. “Every time people thought there was a four- or five-day continuous move, whether it’s up or down, they project that into the future and assume the trend will hold, even if there’s no fundamental basis for it.”
Finally, he highlighted investors’ heightened bias toward action. Even if their best option is to not touch their portfolios at all, it can be hard to just stand still amid drastic swings in financial markets. Under that kind of pressure, they may be compelled to sell too early or buy too late, both of which Kelly said has happened in recent months.
Fortunately, TD’s Wealth Personality assessments equipped clients to respond appropriately to the crisis. Instead of making overly quick and risky moves, they were able to look themselves in the behavioural mirror and realize exactly when they needed someone to talk them down from the decision-making ledge.
“A lot of the value of an advisor is really helping investors avoid emotional decisions when every fibre of their being is screaming at them to give in,” he said. “It can be hard for advisors to confront clients on their financial blind spots, but when clients call and say ‘I’m doing exactly what your assessment said I was going to do,’ it changes the dynamic very positively.”
Knowing a client’s wealth personality is also valuable for advisors, particularly when it comes to determining the appropriate service model. While the oft-cited course of action is for advisors to do more hand-holding during a downturn like the one in the first quarter, Kelly said clients who are highly reactive will benefit more from frequent calls. For those with high conscientiousness, meanwhile, an article reminding them that similar episodes of volatility have happened in the last 10 years might be the better way to go.
The tool also helps advisors overcome their own inclinations that could potentially lead to inappropriate communications. An advisor with high conscientiousness, for example, might want to send a practical scientific note to their clients about a certain event they should be concerned about, but that could just end up stoking unnecessary fear among their high-conscientiousness clients who were already on alert to begin with.
“We have some good outreach tools and resources, but I would say that the real heart of it is just giving the advisor a better sense of the best way to resonate with that individual in times of stress,” Kelly said. “The best advisors are really good at having that gut feel and that intuition, but this just gives us a more scientific way of knowing what's the best and fastest way to help a particular client.”
While the wealth personality assessment has proved its worth, he acknowledged that there’s still room for improvement. TD recently extended its partnership with BEAR, opening the door to a next-gen version that brings more of the science of behavioural finance to risk conversations. The ability to better assess an individual’s capacity for risk, he said, is particularly salient given expanded KYC requirements laid out in the client-focused reforms published by Canada’s securities regulators.
Another area of focus, Kelly said, pertains to the increasing role played by digital technology in wealth management. As more and more interactions play out on platforms like Zoom and WebEx, firms have to think more about its potential impact on clients’ decision-making process and, consequently, advisors’ ability to make sure they’re supporting clients in difficult times.
“We truly do think we've got the right partner with BEAR,” he said. “They've been with us since the start, and we just think the partnership is going to allow us to be terrifically effective.”