In a recent webinar with the Financial Planning Institute of Southern Africa, Rex Cowley, the Director and Co-Founder of Overseas Trust and Pension, shared valuable insights on the transformative impact of behavioural theory on financial planning and considered some emerging trends in South Africa.
He highlighted the combined influence of clients’ socioeconomic backgrounds and personal worldviews on their financial decisions, together with the interplay of behavioural theories on motivation, loss and risk aversion, and the collective consequence that these factors have on financial decision-making. He further stated that these considerations are critical yet often overlooked aspects for Financial Planners.
Cowley emphasised that effective financial planning strategies need to go far beyond mere numbers and product-based solutions if the outcomes clients are seeking from their life’s journey are to be realised.
His argument drew on the work that has been undertaken by some of the leading behavioural psychologists of our time, including Maslow, Herzberg, and Vroom, stating, “Understanding the true drivers behind an individual’s motivation, including their fears, desires and aims, can significantly change the Financial Advisory approach.”
He challenged traditional methods, advocating for a more personalised and empathetic approach to financial planning, which places behavioural theory at the core of the financial planning process and the ongoing client relationship.
Given this point, a principal focus of his lecture revolved around the client’s worldview, which Cowley referred to as the interplay between the human necessity to satisfy physiological and psychological needs, framed against a perspective that is unique to each client.
He elaborated that this ‘worldview’ is conditioned by a client’s values, beliefs and experiences along with the socio-economic factors that the client has been exposed to. Ultimately, these aspects weave together to form the unique contextual tapestry against which a client continually assesses their needs and the likelihood of their needs being met, influencing their decisions and actions – such action being both conscious and subconscious.
Cowley explained in a summary, “A client’s needs determine their behaviour. If the client’s needs are met, their behaviour remains stable or constant. However, if their needs are not being met, or if the client feels that their needs will not be met or could be met more adequately in another way, they will act.”
He illustrated the point on how a client’s worldview can differ significantly by drawing an analogy about opposing reactions from parents when they encounter a dog whilst in the park with their child. One parent allows their child to engage with the unknown dog and the other does not, albeit the external circumstances are identical. Each parent’s decision is guided by their perception of the situation based on their own worldview or ‘truth’ and it is this personal ‘truth’ that primarily guides their decisions more than the objective truth. This applies to all decisions, whether they are financial in nature or not.
He then introduced the importance of ‘loss’ and ‘risk’-aversion theory and how these concepts act as tensioners, which exert or release pressure on a client’s thoughts through push-and-pull dynamics. He added that these play an important role in shaping a client’s behaviour, albeit these influences are often subconscious.
Cowley states that “Financial Planners need to consider this theory and must be able to discuss the decisions that a client has to make in such context, and of course, against the client’s worldview.”
The discussion then moved to address the role of changing behaviour on the formation of trends and how these trends can lead to a paradigm shift. From a South African perspective, he put forward the argument that South Africans are moving from a traditionally domestic mindset to a far more internationalised one in terms of financial planning and identified this trend as ‘the internationalisation of the private client’, which he referred to as a ‘mega trend’.
When discussing this, Cowley focused on three core areas that he identified as ‘macro trends’, which sit within this larger mega trend. These macro trends are a shift towards a more globalised approach to ‘work, wealth and family’ and he supported this argument with a broad range of rich independent statistical data.
Cowley put this into greater context by explaining internationalisation as a phenomenon whereby a client seeks to benefit from opportunities outside of their home country, which relates to cross-border activities, including: the placement of wealth, the acquisition of financial services, the procurement of work, and education.
Cowley emphasised that this phenomenon should not be confused with the concept of emigration, which requires a client to give up their home country for another. Although, the client may spend extended time outside of their home country for work or education purposes.
Cowley concluded that a key enabler behind these trends is the continued relaxation of exchange control regulations in respect of the capital flows in and out of South Africa. Moreover, South Africans are finding that a growing number of their needs are being met more suitably by engaging in a globalised world; hence, the continued development of these trends.
Additionally, Cowley opined that “South Africans are in many ways simply playing catch-up with residents of other countries that have been taking advantage of globalisation since the 1980s and that it is now the South Africans’ turn.”
In conclusion, Cowley urged Financial Planners to adopt a more forward-thinking and international approach to their advice proposition by embracing the value of behavioural studies and true cross-border solutions to meet the evolving needs of South Africans. In doing so, they should better the outcomes for clients whilst ensuring that Advisory Practices remain relevant and competitive in a rapidly changing and globalising world.
PERSONAL FINANCE