Case Study Of Behavioral Finance At Jpmorgan

Register to read the introduction… Susan Hirshman, managing director and wealth strategist, was JPMorgan’s guru, lecturing at major conferences and developing training guides for advisors. The struggle you have today is that you have a whole group of advisors who were brought up in this industry who care about R-Squared, information ratio, capital markets, and who love to talk about these things with their clients… We all use the same processes, like Monte Carlo simulations; we all offer the same technology, the same products in an open architecture… As an advisor, what is your competitive advantage? Why should someone work with you over your competition? You need to differentiate yourself from the pack—and if it’s not process or product—if these are somewhat commoditized—it has to be by using a behavioral approach. Hirshman argued that the key to serving clients was to understand needs and wants. Needs could be ascertained by understanding clients’ demographics, which advisors knew how to do. However, understanding clients’ wants required psychographics. JPMorgan worked with Larry Samuel, a cultural anthropologist, to develop a system to identify the distinct emotive values which drove client investor behavior. Samuel classified millionaires into five wealth signs: Good Life, …show more content…
Hirshman explained: I tell the advisors that your client is coming in for a review, so what do you do? You spend a half hour, look over the numbers. But do you ever take the time to ask just who is your client, what do they want out of life, what drives them? And if you don’t know and don’t customize your approach with them then you are merely a performance reporter—and thus you will only be temporarily working with your clients. As soon as performance is off so is the client. JPMorgan created a guide to enhance the overall impact of client reviews. Hirshman explained that a key component of this process in addition to understanding your client’s passion points was to understand behavioral biases. It is important that advisors look for the biases of their clients that lead to irrational behavior. For example, some clients are overconfident, that is they tend to overrate their opinions and exaggerate their ability to manage their portfolios. Others can fixate on one piece of data or point of view that is not directly relevant to their long term goals. Those clients are what we call anchored. And finally many clients overemphasize recent events when making investment decisions. This is known as the recency effect. These behaviors then cause clients not to act