As a devotee in my youth of Cosmopolitan magazine quizzes offering to tell me how ambitious, adventurous or seductive I was, I jumped at the chance to have my financial personality analysed by Barclays Wealth.
The bank takes a much more rigorous approach to devising its test than the magazine its quizzes, of course, but the Barclays questionnaire takes little longer to complete than a typical Cosmo quiz. It asks 44 deceptively simple questions about your attitudes and your experience of making or losing money.
There is no self-marking for instant results, as with Cosmo, though. Instead, the questions are analysed using psychomectric techniques to get at actual rather than perceived attitudes and behaviourial traits. Make no mistake, this is ultra sophisticated. Indeed, it took two years to devise, and is intended to be a point of difference between Barclays and other wealth managers.
Competitors usually lump people into one of five or six risk profiles according to how much risk they are comfortable taking, according to Arnaud de Servigny, head of quantitative analytics at Barclays Wealth. Barclays is more precise, and takes account of how people behave, measuring six traits including risk tolerance.
Someone might intend to retire in 10 years, for example, but look at their portfolio statement every month. That makes their investment horizon one month rather than 10 years.
“We are trying to articulate who someone is as a financial person, which has never been properly tackled,” says Mr de Servigny.
So who am I? The summary (see chart in the pdf) shows my scores relative to the population Barclays has tested. The risk tolerance score suggests, according to Barclays, I would be comfortable with “investments that have limited potential for losses in exchange for higher returns”; I am “averse” to investments that might produce big losses by the end of the intended investment period; and I accept that this means the growth in my money may not keep up with inflation. Sounds about right, although the inflation bit is a wake-up call.
My high composure score is good news: it means I don’t worry about short-term volatility and am more likely to view my portfolio as a whole rather than look at the individual components and fret when the riskier ones are doing badly. So I won’t be on the phone every five minutes demanding to know why my emerging market holdings have gone down the pan.
Barclays says people can shoot themselves in the foot by over-monitoring their portfolio and worrying too much about short-term fluctuations. It uses composure scores as a guide to the appropriate split between absolute return and market return strategies. A low score suggests a high weighting in absolute return, and vice versa.
Market engagement indicates whether there is a mental hurdle to investing in markets. I am in the “moderate” rather than “engaged” camp, which indicates a desire for safety I must overcome before I engage with financial markets. It also shows I am likely to focus on whether my portfolio is making a decent return and would not be too bothered about beating the market.
Barclays finds my high desire to delegate investment decisions but low belief in skill puzzling. The report says it implies I want someone to take investment decisions, but to restrict them to simple low-cost techniques and strategies. A correct interpretation as it happens. I do not have confidence I would make good asset allocation decisions, partly because of the procrastination factor, so want someone to do that for me and implement at the lowest possible cost. The behavioural finance expert who explained the findings said my low belief in skill indicated “healthy scepticism about the ability to sequentially and consistently beat the market”, which I think sums it up nicely. Barclays would probably recommend more in passive investments than actively managed products for someone like me, he added.
The overall results suggest my portfolio should be split 75/25 between market return and absolute return investments, says Barclays.
I have not been through risk profiling with any other private bank so can’t compare results. Consultants say the approach Barclays Wealth has taken, using behavioural finance specialists to inform it, has been used for some time for seriously rich people, but is unusual in the wider wealth market. It is definitely a point of differentiation, says Scorpio Partnership.
But it is likely to become an increasingly common approach, says Catherine Tillotson, partner at Scorpio Partnership, as private banking is about understanding clients’ behaviour and objectives, rather than focusing on what risk profile they think they are.
“A common complaint from clients is that banks are pushing products onto them,” she says.
Private banking is a highly profitable industry. It is about time it took its customers seriously.
Pauline Skypala is editor of FTfm