The ClientWise Blog

Rules Rule!

Posted by Chris Holman on Jun 7, 2011 10:31:00 AM


There’s a fascinating new report, published by Barclays Wealth that clearly indicates that a high percentage wealthy investors want investment rules. Indeed, 41% of high net worth individuals wish they had more self-control over their financial behavior

The report, Risk and Rules: The Role of Control in Financial Decision Making is based on a global survey of more than 2,000 high net worth individuals, and provides an in-depth examination of wealthy investors from a behavioral finance perspective. It considers the different financial personality traits that exist amongst wealthy investors, and the different self-imposed rules and strategies that they put in place to deal with these traits.

The Benefits of Rules: More Wealth and Happiness
Most interestingly, the report clearly indicates that those who employ a high degree of investment discipline have on average 12% more wealth than those who do not use rules. Better yet, they also experience a 13% increase in financial satisfaction.

According to the principal author of the report, Dr. Greg B. Davies, head of Behavioral and Quantitative Finance for Barclays Wealth, all investors have a unique “financial composure.” There are two aspects to this: 1) Risk tolerance for the long term, and 2) the degree of anxiety that investors experience for the short term. As he points out, classical finance does a good job on identifying and controlling #1…but virtually ignores #2.

However, it is the latter factor that is most destructive to investment returns over the longer term. Many investors, even though they are very aware of their behaviors, can’t help themselves, i.e. they have a natural inclination to respond emotionally to the markets. The cost of lack of investment discipline is significant. Emotional trading can cost investors up to 20% in returns over a ten-year time period.

Gender Differences
The report also illuminates noticeable differences between female and male investors:

  • Women are more likely to use financial self-control strategies, and more likely to perceive them to be effective,
  • Women have a higher degree of self-awareness to their susceptibility to financial stressors,
  • Men are more likely to be financially over-confident…leading to bad behaviors like timing the market, high-frequency trading, etc.


Opportunities for Financial Advisors
The implications of this study are far-reaching, and readily pertinent to how financial advisors engage their clients. Financial advisors might craft the “perfect portfolio” for their clients, but this assumes that all investors are completely rational and able to ignore short-term market events…as well as the 24x7 fear-mongering that seems to emanate from the financial media. Astute financial advisors might offer significant value by helping understand their own emotional make-up, as well as helping design the self-control strategies that are fundamentally important to achieving good market returns.

“First we make our habits, then our habits make us.”…Charles C. Noble

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Topics: Investing