Retirees Behaving Badly

Some advisors are catching on to the benefits of behavioral finance

Despite the havoc it wreaked, the financial market collapse actually proved to be an extremely opportune moment for Augusta, Ga.-based financial management firm Apexx Financial.

Ted McLyman, CEO of Apexx“We took it as a time to get ourselves together and relaunch our business model in a totally different way,” says Ted McLyman, CEO of Apexx.

The firm is now centering its approach to retirement planning around the principles of behavioral finance, seeking to determine before anything else how its clients think and feel about money. McLyman–who heads Apexx’s new Behavioral Financial Group–believes behavioral analysis is the most important part of proper retirement planning and finance, and even before advisors look at their clients’ risk appetites and try to assess their income needs in retirement, they should be aiming to get a keen sense of how they behave vis-à-vis money, and what actually motivates them to take certain decisions.

“Human beings have a thinking and a feeling brain and this is what we want to get a sense of,” McLyman says. “We all have an ongoing bucket list of what we want money for–these are not our goals, they’re what gets us out of bed in the morning and through the day, and if we can get a sense of that, of the important things for which we need money, then we have a chance of planning better for the long-term.”

Using academic research together with established principles of behavioral finance and economics and his own experience in the field (McLyman is a former Marine Corps officer who taught behavioral economics at the U.S. Naval Aacdemy), McLyman has set  up a model that screens Apexx clients for their behavior and attitudes toward money. Clients are asked a series of questions and made to take a few tests, and the answers they give, McLyman says, then provides Apexx an insight into how they think and feel about money, and enables the firm to come up with a strategy designed around that behavior.

“When you know someone’s temperament, you will have a better idea of what products and services suits them, so behavioral analysis should be the first step that any financial advisor takes with his or her clients,” McLyman says.

In the aftermath of the crisis, many financial advisors are struggling to come up with strategies that will safeguard their clients from future dangers. Proper long-term planning, the right mix of investment products suited to risk appetite and fostering deep relationships with clients are all

extremely important, says Cathy Smith, co-director of Allianz Global Investors’ Behavioral Finance Center, but advisors also need to go deeper under the skin and into the minds of their clients and understand their behavior and how this impacts the financial decisions they make.

Allianz set up the Behavioral Finance Center in April in order to provide financial advisors, investors and plan sponsors with behavioral finance research and educational tools. The Center will leverage behavioral finance to enhance investment processes and risk management, Smith says, and will also help to link behavioral finance research to the needs of the retirement and post-retirement market segments. Allianz Global Investors has engaged Professor Shlomo Bernatzi, a prominent expert in behavioral finance at UCLA’s Anderson School of Management, to serve as chief behavioral economist and work alongside the company’s senior executives.

“After the financial crisis, advisors are finding it very tough to restore client confidence and many now are more afraid of being wrong than they are willing to take a chance of being right,” Smith says. “A lot of advisors feel they might have just one more chance with their clients, so they really stand to gain from the insights of behavioral finance.”

According to McLyman, employing behavioral finance methodology in the first stage of retirement planning is the way of the future, particularly in light of the ongoing changes in compliance and regulation and the needs of the American people.

“Ours was a very product-driven industry and we tried to get around it by emphasizing the importance of building relationships with our clients, but there was still something missing and that something is the behavioral aspect, the biology of dealing with money, and the dozens of psychological factors that seem to conspire against us to make some really bad financial decisions,” he says. “If we can get around that and build a strategy centered around behavior, we can do a better job for our clients.”

Apexx’s modus operandi has elicited a great deal of interest among the advisor community, McLyman says, and so the firm is in the process of setting up a portal that, for a small fee, will allow advisors to learn from its experiences and use its tools and methods.

“The model is working well for us and we are eager to share it around,” he says.

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