Financial advisors: behavioural finance this unknown

Behavioural finance is something for Nobel laureates, but not for Italian financial advisors and their clients. The research carried out by Finer for the Efpa Italia Annual Meeting, which took place a few days ago in Florence under the theme "WYSIATI. Finance between reality and prophecy', shows in fact that only 17 per cent of clients and 66 per cent of professionals say they know what it is. Efpa, the professional body in charge of setting standards and certifying Financial Advisors and Financial Planners, brings together savings professionals, operators and investment services experts at the meeting.

The meeting's title refers to the expression 'What You See Is All There Is', which translates as 'all you see is all there is'. An expression used by the recently deceased Nobel Prize winner Daniel Kahneman, it indicates a mental shortcut that leads us to believe we have a complete frame of reference on the issues we decide on. And so the focus of the meeting is on the opportunities of behavioural finance in the knowledge base of a savings professional. Nicola Ardente, vice-president and regent of Efpa Italia, explains the choice of theme as follows: 'We are an authoritative body for certifying the competences of financial advisors. We have reached 11,500 certifications and this is an important traquardo. Behavioural finance is one of the fundamental themes of a consultant's knowledge base. In Florence we wanted to propose some reflections to reason broadly with respect to the impact of behavioural finance on both the client and the advisors themselves as operators, to analyse the cognitive limits that often lead to a limited vision". Ruggero Bertelli of the University of Siena raises the issue: 'Looking down, looking only at what we see now, is a mistake. Consultants need to be architects of savers' choices, explaining that it is necessary to talk about investments rather than savings, that there is no point in talking about investments if you do not have a long horizon, otherwise it is simply liquidity'. And Giorgio De Rita of Censis, recalling the title of the event, reminds us that prophecy is not a form of fantasy, but looking inside oneself to understand what one can be.

How is the situation, however? "The impressive thing that struck us the most," explains Nicola Ronchetti, CEO of Finer, "is that despite the fact that behavioural finance has been talked about for years, very few people know about it, both among financial advisors where we have just over 60% who know what it is and even less than 20% among investors. But the most impressive thing is that those few, those who do know it among private banks and financial advisors, mainly use it to talk to clients and not to work out, for example, a portfolio, do an asset allocation". Knowledge of behavioural finance, as far as investors are concerned, is more widespread in the following subject categories: men, boomers, living in the North, educated, multi-banked, clients of a network, with high assets. For professionals, on the other hand, those with certifications, women, young people, those resident in the North, the better educated and those with above-average portfolios are more 'ahead'. According to Finer's study, moreover, the most widespread cognitive errors (loss aversion, herd effect, inertia, anchoring, overconfidence, attribution errors) show significant differences by gender, age and wealth. For example, loss aversion is the item with the highest number of hits for almost all ages, except in generation Z (1997-2012) where the herd effect exceeds loss aversion and in millennials (1980-1996) where the two values are very close. Overconfidence is not at the top (but this could also be an effect of overconfidence, ed.). Turning to the distribution of these biases by asset size, it appears that the mass market sector is more 'skewed' by the herd effect than by loss aversion, a situation that is reversed in the case of the affluent and the 'private-Hnwi', who actually have more to lose. These differences, according to Finer, offer an opportunity to segment current and potential investors in a practical and concrete way. And adds Ronchetti: "And this also has enormous potential in the ability to convert the enormous liquid assets that Italians still have that they do not invest for fear of approaching assets outside the traditional ones, i.e. real estate and government debt securities".