Behavioural Patterns of Affluence

P R E S E N T A T I O N B Y

Andrew Bradley

Chief Executive, Old Mutual Wealth

W E A L T H S U M M I T

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Behaviours of Affluence Andrew Bradley

what is going on?

despite  high levels of affluence & education  the huge range of financial products & providers

available  and, in the face of unprecedented lifestyle choices

& longer, more active retirements

most affluent South Africans are chronically

 under-insured  under-saved  poorly-invested

The reality

The perfect storm

  Why? –  Poor financial decisions

–  Long life expectancies

New longevity dynamics

At 65 years of age:

– in 1800 you were dead 27 years ago – in 1900 you were dead 12 years ago – in 2000 you had 12-15 years to go – in 2100 you will only be half-way there!

source: IBISWorld (Ref 9)

We can live to be a 1000 years old

Prof. Aubrey de Grey

“the first man who will live up to 1 000 years is probably already alive now, and might even today be between 50 and 60 years old”

An Affluent Gerontocracy

  21st century average EU citizen will live 30 years longer than in the 19th century

  a unique, new generation of affluent, older people with a new focus on well-being and quality-of-life

Too much debt!

source: INET

30

40

50

60

70

80

90M

ar-

69

Jan-7

1

Oct-

72

Jul-74

Apr-

76

Feb-7

8

Nov-

79

Aug-8

1

May-8

3

Mar-

85

Dec-8

6

Sep-8

8

Jun-9

0

Mar-

92

Jan-9

4

Oct-

95

Jul-97

Apr-

99

Jan-0

1

Nov-

02

Aug-0

4

May-0

6

Feb-0

8

Dec-0

9

household debt to disposable income %

No savings!!!

source: INET

-5

0

5

10

15

20

25M

ar-

60

Jan-6

2

Oct-

63

Jul-65

May-6

7

Feb-6

9

Nov-

70

Aug-7

2

Jun-7

4

Mar-

76

Dec-7

7

Oct-

79

Jul-81

Apr-

83

Jan-8

5

Nov-

86

Aug-8

8

May-9

0

Mar-

92

Dec-9

3

Sep-9

5

Jul-97

Apr-

99

Jan-0

1

Oct-

02

Aug-0

4

May-0

6

Feb-0

8

Dec-0

9

personal savings to personal disposable income

insurance

-10

-5

0

5

10

15

in r

an

ds

(tri

llion)

life disability

R7.9 trillion

R12.3 trillion

R3.5 trillion

R6.5 trillion

R4 trillion

R6 trillion

required cover actual cover shortfall

Market have performed well over time but most investors have failed!

Ave

rage

fund

12.5%

-2.2%

Ave

rage

fund

10.4%

2.4%

Ave

rage

fund

9.4%

4.1%

USA Australia RSA

Investors

Investors Investors

Page 14

1 in 3 people

will live to age 96

-10

-5

0

5

10

15

in r

an

ds

(tri

llio

n)

life disability

R7.9 trillion

R12.3 trillion

R3.5 trillion

R6.5 trillion

R4 trillion

R6 trillion

required cover actual cover shortfall

30

40

50

60

70

80

90M

ar-6

9

Jan-7

1

Oct

-72

Jul-74

Apr-

76

Feb-7

8

Nov

-79

Aug-

81

May

-83

Mar

-85

Dec

-86

Sep

-88

Jun-9

0

Mar

-92

Jan-9

4

Oct

-95

Jul-97

Apr-

99

Jan-0

1

Nov

-02

Aug-

04

May

-06

Feb-0

8

Dec

-09

household debt to disposable income %

-5

0

5

10

15

20

25

Mar

-60

Jan-6

2

Oct

-63

Jul-65

May-

67

Feb-6

9

Nov-

70

Aug-7

2

Jun-7

4

Mar

-76

Dec-

77

Oct

-79

Jul-81

Apr-

83

Jan-8

5

Nov-

86

Aug-8

8

May-

90

Mar-

92

Dec-9

3

Sep-9

5

Jul-97

Apr-

99

Jan-0

1

Oct

-02

Aug-0

4

May-

06

Feb-0

8

Dec-0

9

personal savings to personal disposable income

The issues are primarily behavioural and psychological

In the same way that poor physical health is often caused by inappropriate behaviours, so too is poor financial health

short term versus long term trade-offs

tangible versus intangible

uncertainty and lack of control

live for the day

peer pressure and status

loss aversion myopic loss aversion

rules of thumb e.g. - saliency

~ overconfidence

~ anchoring

price as a proxy for quality

Innate needs are driving this behaviour…

Page 17

  The independence wealth brings is aspirational

  The most important benefit of wealth is freedom

  Strong emotional pull of ‘being able to play by your own rules’ or ‘being your own person’

  Huge potential to connect more emotionally around desires and aspirations

  Understanding what makes you happy…

The need for freedom

18

“When you are 30 you need to be financially independent, when

you are 40 you need to have a buffer

against the unexpected, when

you are 50 you need to know freedom is only a step away”

sources: Kahneman et al (2004)

happiness and marriage

0%

20%

40%

60%

80%

100%

-4 -3 -2 -1 0 1 2 3 4 5+

years relative to marriage

life

satis

fact

ion

happiness & marriage

sources: Layard (2005); Easterlin (2001)

happiness and income in the US

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1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

real

inco

me

(reb

ased

: 194

5=10

0)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

perc

enta

ge v

ery

happ

y

real income per head percentage very happy

happiness & wealth

the pursuit of happiness  wealth is not money  OECD research “Happiness Index”:

– health, job, relationships, lifestyle biggest contributors to happiness

–  increased earnings makes you briefly happier what you do with it can increase your happiness…

 money enables us to translate our goals and dreams into reality

understanding happiness

what makes you the happiest?

pleasures

approaches to happiness

pleasant/good life   having as many pleasures as possible and having the

savouring and mindfulness skills to amplify the pleasures

engaging activities

approaches to happiness

engaging life   knowing what your signature strengths are, and then

recrafting your work, love, friendship, leisure and parenting to use those strengths to have more flow in life

giving with meaning

approaches to happiness

meaningful life   using your signature strengths in the service of something that

you believe is larger than you are

understanding happiness

what makes you the happiest?

did you expect that?

Parents have aspirations for their children and want to provide them with the best opportunities in life :

  Providing a well-rounded education

  Providing a rich, diverse lifestyle, involving travel and a variety of experiences.

  Helping children get on the first rung of the ladder in their careers or getting them on the property ladder.

However, they want to provide for their children in a way that doesn’t create dependency.

  More than giving children money they want to teach their children the value of money.

  More than supporting their children they want to give them the means to forge their own path.

The need to provide for others

“I give my children certificates or unit

trusts for their birthday it’s

exciting for them and a great way to

teach them the value of money”

HNW, Singapore

  Nothing in life is guaranteed...

  Having money can sometimes seem to be more of curse than a blessing.

  Once you have wealth there is always the nagging worry that it may go away again.

  There’s often a real sense of anxiety about having made the right decisions, or about making the best of what you have.

  The complexity of choice and unpredictability inherent in investing don’t make things easier and people can feel overwhelmed by their options.

The need to control my anxieties

31

in making decisions

  everything matters

what do they need? number of people who

tasted

6 jams

30 jams

source: Iyengar, S. S. & Lepper, M., “When Choice is Demotivating: Can One Desire Too Much of a Good Thing?”, Journal of Personality and Social Psychology, 79, 995-1006. (2000).

what do they need? number of people who

actually bought

6 jams

30 jams

source: Iyengar, S. S. & Lepper, M., “When Choice is Demotivating: Can One Desire Too Much of a Good Thing?”, Journal of Personality and Social Psychology, 79, 995-1006. (2000).

extensive choice demotivates participation

50%55%

60%

65%

70%

75%80%

2 7 12 17 22 27 32 37 42 47 52 57

number of funds offered

participation rate

source: Iyengar and Kamenica (2006)

  Needs change as a result of progressive life-stages and external events.

  The reason we engage with investments in the first place may be very different to the reason we engage with them further on through the journey.

  Currently investment products fail to incorporate the kind of flexibility needed to deal with the unpredictability of life events.

  Either leaving investors locked in to inflexible plans or causing them to opt for simpler more short term products.

The need to change as life changes

36

  These clients know that they have the ability to pick and choose who they work with.

  So they pick carefully.

  If they see a potential partner or provider, they often test them out with a lower risk task.

  Over time, as their trust builds, they move on to bigger and more important projects.

.

The need to trust

37

“I gave an adviser $10K and I said

show me you can do something with this and then we’ll talk about the rest

of my money” HNW Singapore

“advisers have to earn the right to call you up with

new products and offers. Until

they’ve earned that trust I only want to them to keep me up to date with

what I have.” HNW Italy

This is a cliché because it’s true.

Everybody’s got a life outside wealth management and they want to enjoy that life.

For less involved clients, this means not having to deal with the unimportant details – but being given clear options so a confident choice can be made.

For more involved clients, this means not having to wait around to speak to an adviser. It means getting the information you want when you want it and in the format that’s most appropriate to you. In real time.

Saving our clients time will help them to enjoy their wealth rather than being a prisoner to it.

The need for more time

“I used to play golf but that took 4 hrs, then moved onto tennis which took 2hrs now I

play squash it only takes 45minutes. This is the reality of my life now” HNW Dubai

  No matter what the knowledge level of the individuals…

  See value in having a better understanding of the world of investments

  Style of advice is very important

  Overwhelming preference for coaching over more formal style of education

  Practical advice that acknowledges their current level of understanding and builds on it

The need to understand more...

How do we help clients meet these needs?

40

Managing behaviour “To invest successfully over a lifetime does not require stratospheric IQ, unusual business insights, or inside information.

What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework”

- Warren Buffet

changing poor financial behaviour

Unconscious

1

Undesirable behaviours occur unconsciously

2

Undesirable behaviours recognised, desirable behaviours identified, coaching required

Consc

ious

Unco

nsc

ious

External support required External support not required

3

4

Desirable behaviours unconscious, embedded

Desirable behaviours consciously self-regulated

Conclusion  The world is continually changing  We need to provide a simple framework to help

them make sense of this.  To do this we need to understand their needs

and how they relate to these changes  The greatest value we can add is to assist our

affluent clients manage their behaviour

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