Report from Absa Wealth reveals nearly half of all wealthy want more financial discipline

• New report provides in-depth global analysis into financial personalities of the wealthy
• South African wealthy are amongst the markets that show least desire for more financial discipline
• Reports reveals link between the use of financial self-control strategies and wealth
• Emotions that tempt us to buy high and sell low can cost investors nearly 20% in returns over ten years

Despite their wealth, 41% of high net worth individuals wish they had more self-control over their finances, says the latest report in the Barclays Wealth Insights series. Interestingly, a need for increased financial discipline is likely to be felt most by those at the wealthiest end of the scale (£10m+), where 45% of respondents wish they had more control over their finances. This is despite the report showing that those who want self-control are less likely to be satisfied with their financial situation.

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 behavioural 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. Emotional trading can cost investors nearly 20% in returns over a ten-year period[i], and the report shows that those who employ high strategy usage have on average 12% more wealth than those who do not use rules.

Globally, respondents in Asia-Pacific have the greatest desire for more financial discipline, particularly in Taiwan and Hong Kong. Respondents in South Africa rank fourth of all markets that show the least desire for more financial self-control, behind respondents in Spain, Australia and the US.

Markets showing the greatest desire for more financial discipline

1. Taiwan
2. Hong Kong
3. Korea
4. Qatar
5. Japan

Markets showing least desire for more financial discipline

1. Spain
2. Australia
3. US
4. South Africa
5. UAE

Greg Davies, Head of Behavioural Finance at Barclays Wealth said: “Many people will be surprised to see that wealthy individuals have a desire for greater financial discipline, however with increased wealth comes an increased complexity of investment decisions. The key thing that investors need to consider is how these decisions might fit in with their overall investment strategy, and importantly, how they fit in with their individual requirements, both financial and emotional.”

Nomkhita Nqweni, Managing Executive of Absa Wealth, a division of Absa Bank Ltd and an affiliate of Barclays Wealth said: “This report provides an in-depth study into the financial personalities of wealthy investors in South Africa and gives a fascinating insight into their behaviour. When it comes to financial discipline, there is little desire for more control when compared with other markets, which presents an interesting challenge for the wealth management industry. Clearly, more needs to be done to help clients understand their financial personality and the benefits of using financial self-control strategies.”

Emotional trading and lost returns

In order to understand investment behaviour and the pitfalls that investors may be prone to, the report considers three personality dimensions; risk tolerance, composure and promotion vs. prevention.

It reveals an interesting pitfall on the theme of “emotional trading”, which can tempt us to buy high and sell low, which can cost investors nearly 20% in lost returns over a ten-year period[ii]. Limitations of self-control lead to what the report identifies as the trading paradox. Globally, a third of those polled (32%) say that trading frequently is necessary to get a high return, however these respondents are over three times more likely to believe that they trade too much. In total, almost half (46%) of respondents who believe you have to trade often to do well think that emotions force them to do this.

This can potentially lead to the investor becoming unable to control how often they trade. Of all the personality types, the most likely to fall into this category are those with low composure, high risk tolerance and a high prevention focus.

Rules rule

The use of rules and strategies in financial decision making are seen as hugely effective by wealthy respondents. They provide increased financial satisfaction, and are associated with higher wealth levels for those who report wanting more financial discipline. Comparing the group with the highest strategy usage to the lowest strategy usage, we see a 13% boost in financial satisfaction and a 12% boost in wealth.

The report shows that investors use many types of decision-making strategies to control their decision-making process, and use rules more in financial decision making (89%) than they do in everyday life (72%). The most popular include using cooling-off periods (91%) and setting deadlines (90%).

Delegating to others (72%) and limiting your options (64%) are less popular options, although both those with inherited wealth and an increasing level of wealth are more likely to rely on others and delegate financial decisions.

The report shows that a combination of strategies is most often employed as people tend to take the multiple approaches of; involving others, being more structured and/or removing temptation.

Greg Davies continued: “If we attempt to follow a fully “rational” path without self-control the effects are clear – we will overtrade, and we will buy high and sell low. As a result we will be less effective and less satisfied investors. In order to prevent this we need to take steps to facilitate our efforts to exert self-control.

“This can only happen if we give something up, such as our flexibility to responding to market movements with knee-jerk reactions, or it may mean sacrificing a small amount of the performance of the “rational” portfolio in order to ensure that we have a portfolio with which we’re emotionally comfortable in the short term.”

The Zen of Ageing

The report also shows how a desire for greater financial discipline declines markedly with age, from over half (53%) of those aged 45 and under wanting more control over their finances, to just a quarter (26%) of over 65s. This in turn results in less need for the use of strategies. This is also associated with a decrease in stress and an increase in financial satisfaction.

Younger respondents also show a habit of deliberately avoiding information about how the market or their portfolio is performing – (82%) of those aged 45 and under do this, compared to just 68% of those aged 65 and above.