TD Wealth is using innovative technology to help clients make better financial planning decisions.
Do you approach financial decisions methodically? Most of us would say yes, when it comes to how we invest our money, we’re driven by reason, not impulse or emotion. However, recent advancements in the field of behavioural economics – an area of study focused on understanding the underlying factors that drive financial decision making – have found that this is rarely the case, when it comes to money, we are far less methodical than we like to believe. Everyone—even investment veterans—can be subject to financial blind spots, which are often rooted in emotion.
In Thinking, Fast and Slow, Daniel Kahneman, winner of the Nobel prize in economics, argues that the brain is divided into two systems. System 1 is in the cognitive driver’s seat, and it’s responsible for instantaneous decision making and intuitive reactions, such as veering to avoid an accident while driving. System 2, meanwhile, is called on for focused reasoning or analysis. Because humans are extremely good at being efficient, we’re often coasting in System 1, which is great for coming to quick conclusions. When it comes to matters of money, though, decisions made on the mental equivalent of autopilot are a bad idea.
According to David Terry, VP and Head of TD Wealth Financial Planning, everyone has financial blind spots. “That’s the reality of being human,” says Terry, who has overseen the rollout of the TD Discovery Tool, a proprietary technology that works with the principles of behavioural finance. The Discovery Tool uses a Five Factor Model of Personality to enhance interactions between an advisor and client, allowing advisors to develop hyper-personalized investing strategies based on a client’s personality, family profile, motivations and savings goals.
TD is the first Canadian bank to apply the concept of behavioural finance to a client-facing system. The reason the Discovery Tool works so well is because it uses a 50-statement questionnaire, derived from the Five Factor Model of Personality (extraversion, reactiveness, openness to experience, conscientiousness and agreeableness) to help source a client’s investing persona. The tool also helps TD advisors better identify the circumstances that prompt a client’s System 1 “mental short cuts” to make financial choices misaligned to their long-term goals.
“If someone is ranked high on reactiveness, they are more prone to want to do something if the markets drop significantly. However, in many cases the best thing to do when the market drops is nothing,” says Terry, who sees this tool as a way for TD advisors to hone in on their clients financial blind spots, so they can guide them toward making the best possible investment decisions.
Being too sensitive to the noise of the market is one of the many different types of blind spots that TD advisors identify using the Discovery Tool. Other blind spots include loss aversion (having a stronger emotional response to a 10 per cent loss versus a 10 per cent gain), overconfidence (which can yield lower returns because of excessive trading), and familiarity (which can result in an undiversified portfolio, heavy on known entities).
Terry explains that the Wealth Personalities have many uses. Foremost, identifying Wealth Personalities helps TD Advisors triage clients in times of financial volatility. For example, should the market start free falling, those who scored high on reactiveness have a propensity to react quickly. As these individuals might be tempted to prematurely pull out from investments at the market’s nadir, their TD advisor would call to assuage anxieties, and help them better understand the financial turbulence with some comfort.
Identifying a client’s Wealth Personality can also help an advisor promote better communication during regular portfolio discussions. “A client who scores high on agreeableness values social harmony,” explains Terry. “They will leave a lot of questions unasked in a meeting, so we can prompt them to ask unasked questions, especially when discussing complex financial strategies.”
The Discovery Tool was launched by TD Wealth in 2017 to its Private Wealth Management clients and is now being rolled out to its Financial Planning clients. In late 2018, TD Wealth became a founding sponsor of the University of Toronto’s Behavioural Economics in Action at Rotman (BEAR) program.
The sponsorship will allow TD Wealth to further research the underlying emotions and behaviours that drive financial decision making and achieve an even deeper understanding of this complex area of study.
“Many Canadians have people who will confirm their points of view, but they need someone who will challenge those points of view, and a good financial adviser can really make a difference,” says Terry, who sees TD advisors acting as an ersatz System 2, there to curb impulsive decision-making and ensure that clients make informed, methodical, well thought-out choices to ensure they meet their long-term financial goals.
