Corbin Footitt of Verecan Capital Management argues behavioural risk management must be embedded in every client touchpoint, not just crisis moments
Behavioural risk is, arguably, the wealth management industry’s core focus, especially as full-service financial planning has taken hold. The assumption, now commonly held throughout the industry, is that market risk and inflation risk are secondary to the damage that can be done when a client panic sells, chases market highs or otherwise deviates from a process and a plan. It’s bad behaviour, we now all agree, that is most likely to cause someone to buy high and sell low. The question, then, is how advisors can control for that bad behaviour.
To Corbin Footitt, the answer lies in ‘operationalizing’ behavioural advice. Where behavioural management is often seen as a soft skill and something that advisors integrate when clients come expressing real worry, the Portfolio Manager at Verecan Capital Management believes that behavioural advice needs to be integrated at every stage of an advisor’s work. He explained how advisors can use consistent communication, planning, soft skills, and asset allocation to control for clients’ and their own bad behaviours.
“It’s treated as a client education piece rather than an actual practice management operational piece. If advisors are only reaching out at times of turmoil, it will lead the clients to believe that anytime the advisor reaches out, something’s wrong,” Footitt says. “I see it not being built into review meetings. It’s not being built into rebalancing. The actual behavioural side of it is only being brought up when the advisors feel that the behaviour is going to be detrimental to the client… In the absence of only doing it at that time, you run the risk of not being able to actually coach the client and get them to understand what it means for them in the long run.”
Behavioural risk can happen any time
Behavioural risks can happen in bull markets as well as bear, Footitt notes. In the contemporary bull run he has seen the fear of missing out (FOMO) motivate investors who ask why they’ve not achieved 20+ per cent returns in line with the market. He’s had a few clients asking about the SpaceX IPO, even though that’s outside his firm’s structure and approach.
While Footitt is heartened to see that most clients have avoided some of the more hyped names on the market, he emphasized the importance of consistent communication rooted in the clients’ financial plan. When they want to chase higher returns in a bull market, he can point those clients to a plan that only requires a certain return threshold, and highlight the risks they’re now protected against on the downside. He believes that behavioural risk management should be factored into portfolio construction for exactly this reason.
“The best portfolio on a spreadsheet might not be the best for a client if they can’t weather whatever volatility it might hold. So it needs to be financially appropriate, but as well behaviourally suitable, because that helps us then balance the growth, the income, the volatility, downside protection, and their overall comfort,” Footitt says.
As a discretionary manager, Footitt has the trust of his clients to allocate as needed for their plan, but he can sometimes feel the emotional side of investing himself. At his firm, however, an investment committee steers decision making for client portfolios. When ideas are discussed openly among trusted colleagues, he explains, some of the emotional motivation behind a potential decision gets taken out.
Communicating in a noisy time
Consistent communication underpins Footitt’s approach to behavioural risk. He notes that the current media landscape puts huge pressure on clients to come up with reactions and decisions based on the news. Through frequent messaging, in high and low tension moments, he seeks to control for the way news can shape client emotions.
“It’s made every headline seemingly feel like a decision point,” Footitt says of the current media environment. “More information doesn’t necessarily make people more informed, it makes people more reactive.”
Footitt uses the example of a client reacting to news that corn prices in Malaysia are rising, something that has no bearing on their portfolio. However, because the news is frequently so scary and framed as life or death at any instance, they’ll react with the same emotions as when they find out about war in Iran. There’s a degree to which the medium on which they read the news is more important than the news itself, eliciting that consistent emotional reaction.
Footitt’s answer to this is to stay consistent with his communication. He tries to identify what’s already been priced into the market, what the forward implications might be, and how his clients are protected. He works to immediately bring the client back to the plan, something that he communicates about in any news or market environment. His communication strategy serves his behavioural risk management. In the same way as his asset allocation strategy, his financial planning work, and every other aspect of his role as an advisor also serve that goal of managing behavioural risk.
“It shouldn’t just be a soft skill like asking better questions. It needs to be something that is really integrated throughout every single touch point that the advisors are having with the clients,” Footitt says. “Consistent messaging, timely communication, context back to their goals. And then that helps reduce the emotional decision-making that clients often fall into.”
