What do the wealthy want?
The answer, according to the Barclays Wealth Insights report released on Monday: financial discipline.
Forty-one percent of the more than 2,000 high-net worth individuals surveyed reported they wish they had more control over their finances, which is critical since emotions can cost investors up to 20% in returns over a decade if individuals buy high and sell low. At the wealthiest end of the scale, those with $15 million or more, 45% of respondents want better self-control. This is in spite of 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 the first in-depth examination of wealthy investors from a behavioral finance perspective.
Meanwhile, the desire for self-discipline depends a lot on geography: respondents in Asia-Pacific have the greatest desire for financial discipline, particularly in Taiwan and Hong Kong. In contrast, developed markets show the least desire for self-control.
Wealthy investors in the U.S., compared to the rest of the world, are more satisfied with their financial situation, ranking 5th among the countries surveyed. Yet 29% say they still wish they could take a more disciplined approach to their finances. Regionally, investors in the Midwest and West have the highest levels of satisfaction with their financial situation, while those in the Northeast have the lowest.
The report also looks at three aspects of personality: risk tolerance, composure and promotion vs. prevention.
Globally, 32% of investors believe that trading frequently is necessary to obtain a high return, yet these same respondents are over three times more likely to also think that they trade too much, though this seems to be more of problem for the international than the U.S. investor. The survey found that 23% of high net worth investors in the US seem to avoid ‘emotional trading’ by adopting a buy and hold strategy. Meanwhile, only 15% of US respondents believe to do well in the financial markets, you have to buy and sell often and only 8% felt that they buy and sell investments too much.
The report found difference between male and female investors, with 45% of women surveyed reporting a greater desire for self-control in their approach to financial management, compared to 39% of men. Women also report getting stressed, though the report’s authors suggest that this could be because of their greater desire for financial discipline, which is ironic given it is actually men who need to have greater discipline since men tend to be over-confident, which in turn leads to lower returns. Men are more likely to try to strategically time the market instead of buying and holding are also more likely to trade more than they should.
The survey concludes that using rules and strategies in financial decision making, such as cooling-off periods, a more structured environment, removing temptation and setting deadlines, is extremely effective for wealthy respondents. Wealthy respondents say they feel increased financial satisfaction, and have higher wealth levels than those who don’t use financial strategies. When the group with the highest strategy usage is compared to the lowest strategy usage, there is a 13% boost in financial satisfaction and a 12% rise in wealth.
“Despite the fact that classic finance theory completely assumes that people are rational all the time, the report shows that 41% globally actually wish they had more self control in their financial behavior,” said Greg Davies, Head of Behavioral Finance and Quantitative Finance at Barclays Wealth, in a phone conversation. “People are aware they need help to do the right thing. In times of calm we need to look at financial decision making structure so that when stressful times come we can do something about it.”
“Many people will be surprised to see that wealthy individuals have a desire for greater financial discipline. The thought is that one of the luxuries of being wealthy is you don’t have to worry about discipline or getting it right all the time. But the wealthiest are the most concerned,” he added. “There is evidence in this report to suggest that the people who use the self-control strategies are successful and as a result those who use these strategies tend to be wealthier. 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.”