WEALTHTECH INSIDER: Help Clients Improve Outcomes with Goals-based Investing, Part 1


Behavioral finance is at the heart of financial advice and wealth management, according to Orion Advisor Services.

As little as six or seven years ago, that would have been an outrageous claim for a giant wealthtech built on portfolio management, accounting, and reporting, said Daniel Crosby, Chief Behavioral Officer for Orion, but now it’s also central to the mission of financial technology.

“The work advisors do is incredible, the potential to add value, both portfolio and investment value and real-life value to clients is immense, but it is capped by your ability to effectively manage behavior,” said Crosby. “Our mission is to bake the best behavioral practices into your technology so this becomes a seamless part of the process.”

To that end, Orion has embedded an asset bucketing functionality, called Protect Live Dream, into its software.

Why Behavior Finance

Several studies have identified a “behavior gap” that sandbags the performance of investors. Put simply, the behavior gap is the difference between market returns and investor returns.

For example, $10,000 invested over the past 50 years in a broad basket of value stocks would have grown to $2.1 million, said Crosby, while the same amount invested for 50 years in a broad basket of growth stocks would have grown to $1.7 million.

However, the average investor did a lot worse—according to DALBAR, the average investor earned about $218,000 on their $10,000 investment because their behaviors—driven by natural fear and greed—had them trading in and out of financial markets.

“Merrill Lynch compiled a meta-analysis of all of the things that advisors do to benefit clients like product selection, asset allocation, tax management and behavioral coaching, and the good news is that it all adds value,” said Crosby. “But the behavioral piece, even the least impactful behavioral consideration, which is client assessment, just knowing who your clients are, is more impactful than the most impactful old-school approach, and something like behavioral coaching adds many orders of magnitude of value to the relationship.”

Bucketing as a Form of Framing

Bucketing plays into an impactful behavioral finance technique, said Crosby: Framing.

“The way an asset is accounted for or framed has a lot to do with how it is saved, invested or spent,” he said.

For example, if you walked into your local coffee shop and the barista told you that they had a new drink that you might like that is 90% fat free, you might be tempted to try that drink. If you walked into that shop a week later and a different barista told you their new coffee drink was 10% full of milk fat, you might be less likely to drink it.

Framing may be even more impactful when it comes to money. A study of criminals in Norway found that they bucketed the money they received from illicit activities separately than they bucketed legally begotten money. Legal money might be given to charity or spent on a gift for grandma, while illicit money was more likely to be spent on more illegal activity like drugs.

Another example can be found in the fiscal stimulus paid out during the George W. Bush and Barack Obama presidencies. The Bush stimulus was framed as a rebate, while the Obama stimulus was framed as a bonus.

“What do you do with a rebate? You save it and stuff it under your mattress,” said Crosby. “What do you do with a bonus? You buy TVs and couches and cars and put down payments on houses, the things we wanted people to do to stimulate the economy. The simple act of taking stimulus and changing it from a rebate to a bonus had an impact on how successful the program was.”