the behavioral wealth advisor · behavioral wealth management is an ongoing process with concrete...

The Behavioral Wealth Advisor

June 16, 2020

C. Thomas Howard, PhDCEO and Chief Investment Officer

Lambert BunkerVice President, Business Development

AthenaInvest Foundation and Research

Behavioral Wealth Advisor 2

C. Thomas

Howard, PhDEmeritus Professor of Finance

University of Denver

Chief Investment Officer

Patented

Behavioral Research

Six US and International Patents

STRATEGY

CATEGORIES

MARKET

BAROMETERS

FUND AND

STOCK RATINGS

FOR PROFESSIONAL USE ONLY


✓ Behavioral Finance Foundation

✓ Behavioral Investing Challenges

✓ Behavioral Wealth Advisor Model

✓ Behavioral Resources

✓ Key Takeaways

Today’s Discussion


BEHAVIORAL FINANCE FOUNDATION

4FOR PROFESSIONAL USE ONLYBehavioral Wealth Advisor

Old

Has not evolved in 150,000 years

Hungry

Consumes 20% of our daily energy but is only 3% of body weight

Impatient

Optimized to survive the threats faced 150,000 years ago

The Human Brain


The Behavioral Investor by Daniel Crosby (2018)


How we make decisions is all about conserving energy


• System 1 – instinctive and quick

• System 2 – thoughtful and slow

• Financial evolution at the speed of thought

Daniel Kahneman, Thinking, Fast and Slow, 2011, Farrar, Straus and GirouxAndrew Lo, Adaptive Markets, 2017, Princeton University Press


KEY CONCLUSIONS

PEOPLE ARE NOT RATIONAL

MARKETS ARE NOT EFFICIENT

THESE BUILT THE FOUNDATION FOR

BEHAVIORAL

PORTFOLIO MANAGEMENT

Nobel Prize Recognizes Behavioral Researchers


Robert

ShillerMarket Volatility

2013

Daniel

KahnemanProspect Theory

2002

Richard

ThalerBehavioral Nudging

2017



Investor Cognitive Errors

The Undoing Project by Michael Lewis (2016)

Myopic Loss Aversion

Social Validation

Availability Bias

Availability Cascade

Representativeness

Framing

WYSIATI

Anchoring

Fallacy of Information

Fallacy of Control

Peak-end Memories

Fooled by Randomness

Phantastic Objects


Emotional Triggers & Cost Of Emotions

2.3

7.4

9.4

14.8

19.0

0

2

4

6

8

10

12

14

16

18

20

22

T-Bills S&P 500 Best Funds Best Stocks Best Markets

Ann

ua

l R

etu

rn

For the period April 1997 through September 2016. For details regarding truly active funds (DR5 funds), Best Idea Stocks

(DR5 stocks), and Best Markets, visit AthenaInvest.com. Data sources: AthenaInvest, Thomson Reuters Financial, and Lipper

Concentration

Tracking Error

LeverageEmotional Triggers

Volatility &Drawdown


BEHAVIORAL INVESTING CHALLENGES


1. Short-Term Bias

2. Failure To Plan

3. Under-allocation to Growth

4. Over Reaction to Volatility

5. Over Diversification

6. Performance Chasing

Some Common Behavioral Challenges


Long-term is Longer Than We Think

Behavioral Wealth Advisor FOR PROFESSIONAL USE ONLY 12

The Power of Planning


10

2530

25

4540

5550

65 65

1 2 3 4 5 6 7 8 9 10

What We Do Over-Diversify

Under Allocation To Growth

10

20

30

40

50

60

70

80

90

100

1 2 3 4 5 6 7 8 9 10

What We WantDoesn’t Exist

Forgone Wealth

1015

4035

75

40

65

120

75

145

1 2 3 4 5 6 7 8 9 10

How It Really Works Active Management

FOR PROFESSIONAL USE ONLY 14Behavioral Wealth Advisor

Stocks Are Not Risky- But They Are Highly Emotional!

Volatility is not Risk!


Over-Diversification


AVERAGE LENGTH OF ACTIVE EQUITY FUND UNDERPERFORMANCE / OUTPERFORMANCE (2003 – 2017)

Performance Chasing & Dumping


Source: How Long Can a Good Fund Underperform Its Benchmark, Paul D. Kaplan, Ph.D. and Maciej Kowara, Ph.D., Morningstar Manager Research, March 20, 2018

The 3 Year decision


Solutions

• Risk

• Liquidity

• Income

•Growth

Planning

• Financial

• Tax

• Estate

Behavior

• Education

• Perspective

• Coaching

Behavioral Wealth Advisor

Behavioral Wealth Advising combines Planning, Solution Selection and Behavioral Guidance.

When combined, they make a dramatic difference in the overall client experience and value proposition.


Combined Value

Solutions Planning Behavior

Advisor Value Proposition

Financial Value

3x-5x

Wealth

Over

10-20 Years

Emotional Value

Control

Confidence

Comfort


• How Scared Are You ?

• How Old Are You ?

• Volatility

• Drawdown

• Standard Deviation

• Tracking Error

Addressing Fear and Anxiety

• Will I run out of money

• What if one of us dies

• What if I lose my job

• What if they leave me

• Can I maintain my income

• Will I have to downsize

• What about taxes

• What about • Dot.com, 08/09

• Oil, election


Needs Based Planning


Creating Client Confidence


Portfolio Planning Framework – Separation of Concerns

Stable PrincipalGOAL

Loss of ValueBIGGEST RISK

Accumulate WealthGOAL

UnderperformanceBIGGEST RISK

Fund Ongoing NeedsGOAL

Decrease in PayoutBIGGEST RISK

LIQUIDITY INCOME GROWTH


Dynamic Allocation

Tactical

INT Equity

US Equity


Strategic AllocationLong Term

Global Equity

Tactical AllocationOverweight / Underweight

Market Exposure

Strategy Diversification


Diversify By Strategy

Select Better Strategies

Select Truly Active Equity Funds


Desirable Behavior Strategy

Consistency Conviction

CharacteristicsSmaller

Specialized

Closet Indexing

Portfolio Designed To Perform and To Stay Invested

Tactical

INT EC

INT MCUS FG

US CP

US V

US P


Strategic AllocationStrategy Diverse

Truly ActiveSpecialized Expertise

Tactical AllocationResponds To Market Conditions

Opportunistic & Defensive

Relationship Model - Matching Needs to Solutions

Risk Protect

Investments Grow

Tax Planning Preserve

Estate Planning Transfer

CLIENT BEHAVIORAL ADVISOR

NEEDS BASED PLANNING

EXPERTS

SOLUTIONS


Behavioral Client

Experience

Discovery

• Values

• Concerns

Planning

• Needs

• Choices

Solutions

• Outcomes

• Expertise

Plan Progress

• Success

• Behaviors

Plan Adjustments

• Inventories

• Checklists

Guidance

• Education

• Coaching


BWA Process Model

Re-define Success

• Needs Met / Not Met

• Since Inception Results

Reinforce Key Behaviors

• Years on Plan

• Sticking to Plan

• Positive Personal Choices

• Contributions / Withdrawals

Focusing On What You Can Control

Checklists & Inventories

Financial

Plans

✓Liquidity

✓Income

✓Tax

Risk

Assessment

✓Life

✓Liability

✓Disability

Account

Inventories

✓Accounts

✓Titles

✓Beneficiaries

Estate

Documents

✓Document

✓Location

✓Last Updated


A Consistent Market View

FOR PROFESSIONAL USE ONLY 31Behavioral Wealth Advisor

Behavioral Guidance

Relationship Foundation

Style

Tendencies

Concerns

Values

Drivers

1. Listen

Acknowledgement

Emotion, Feelings

Root Concerns

2. Reframe

Information

Education

Perspectives

Alternatives

3. Redirect

Substitute

Behaviors

Concrete

Steps

Agreements


BEHAVIORAL RESOURCES


Behavioral Viewpoints - A Unique Perspective

FOR PROFESSIONAL USE ONLY 34

Focusing on Behaviors

❑ We take a behavioral view of the markets and financial advice.

❑ The Viewpoints section of our website is a valuable resource for unique behavioral perspectives

❑ The AthenaInvest investment process is based entirely on behavioral factors.

Get behavioral insights straight to your inbox :Register at www.athenainvest.com/subscribe

Behavioral Wealth Advisor

http://www.athenainvest.com/register

✓Markets are dominated by behavior and emotional crowds.

✓ In large part, emotions determine investor success.

✓ Redefining risk beyond volatility is critical to making the transition.

✓ Needs based planning reduces emotional triggers and builds control, confidence and comfort.

✓ Build portfolios designed to help investors stay invested for the long term.

✓ Advisors are incorporating behavioral guidance to mitigate client behaviors that can destroy wealth.

✓ Behavioral Wealth Management is an ongoing process with concrete behavioral elements.

✓ The Behavioral Wealth Advisor model combines planning with solution selection and behavioral guidance.

✓When combined, they make a dramatic difference in the overall client experience and value proposition.

Key Takeaways


FOR PROFESSIONAL USE ONLY 36

“In large part, emotions determine investor success.”

Tom Howard, PhD, CEO and Director of Research, AthenaInvest

Questions ?

Contact Us

Tom Howard [email protected]

Lambert Bunker [email protected]

Steve Bogosian [email protected]

David Stock [email protected]

www.AthenaInvest.com

mailto:[email protected]




http://www.athenainvest.com/

RISKS: An investment utilizing our investment methodology involves risks, including the risk of loss of a substantial portion (or all) of the amount

invested. There is no assurance that the investment process outlined in this document will consistently lead to successful results.

You should consider the investment objectives, risks, charges, and expenses carefully before investing.Athena fact sheets contain this and

other information, and may be obtained from AthenaInvest by calling (877) 430-5675 or visiting us online at www.athenainvest.com. Please

read the fact sheets or prospectuses carefully before investing.

• Some figures shown are pre-inception research results. Hypothetical or simulated performance results have inherent limits. Unlike an actual

performance record, simulated investments do not represent actual investments.

• Some figures shown are past results. Past performance does not guarantee or indicate future results.

• There are risks involved with stock investing, including the risk of loss of principal. There is no assurance that the investment process will consistently

lead to successful results.

• Opinions and forecasts regarding industries, companies, countries and/or themes, and portfolio composition and holdings, are all subject to change at

any time, based on market and other conditions, and should not be construed as a recommendation of any specific security.

INDEX DEFINITIONS

Indices used in this presentation are for comparative purposes only. Index performance does not reflect fees, expenses, or taxes and it is not possible to

invest directly in an index.

For more information please call (877) 430-5675 or visit us online at www.atheninvest.com.

Copyright © 2020 AthenaInvest, Inc. All Rights Reserved. US Patents 7734526, 8352347, 8694406 | Singapore Patents 150371, 184692 | Taiwan Patent

200828170

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