The wealth management offering
Behavioural finance - from lab to life Enrico De Giorgi, Co-Founder and Member of the Board of Directors at Yainvest, looks at unlocking profitability via exceptional service and deep client understanding.
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After 15 years of declining profitability for wealth managers, a new generation of behavioural finance promises to turn the tide. According to the BCG Global Wealth Report 2023, the pre-tax profit margins for global wealth managers experienced an average decline of 2.3 basis points in 2022. The decrease in profitability is attributable to escalating costs, whereas certain regions witnessed increased profits primarily driven by elevated interest rates. However, as BCG said: “Relying on high-interest rates for sustained benefits is not a viable longterm solution.”
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Indeed, wealth managers must adopt fresh initiatives on both the revenue and cost fronts. The escalating competition and downward pressure on fees only underscore the necessity to increase assets under management (AUM). But despite declining profitability, the business model in wealth management has remained substantially unchanged, indicating that the industry now faces an innovation gap. Indeed, a shift from traditional, product-focused, push-driven models to digitally enabled total clientcentred interactions. Clients now demand transparent and individualised services with the same quality of interaction in person and digitally.
Using behavioural finance to empower wealth managers, enabling them to understand their clients better and enhance both performance and profitability. Indeed, after decades of advancements in behavioural finance, we now understand how humans make financial decisions and the cognitive biases that can hinder them from reaching their longterm financial goals. Applying behavioural finance necessitates a robust scientific and technical framework. Traditional investor categorisations based on surveys are insufficient and are no longer perceived as a value-added exercise by advisers or their clients. Many existing profiling tools still apply simplistic approaches to determine clients’ risk preferences and entirely ignore behavioural biases, and making advisers unable to anticipate clients’ future behaviour when confronted with market ups and downs. However, clients still expect to be central to wealth managers’ business philosophy.
“Leveraging behavioural finance, wealth managers unlock a deeper understanding of their clients, fostering unwavering loyalty through all seasons leading to more AUM."