The portrait of Financial Personality
“If you don’t know who you are, the market is an expensive place to find out.” – Adam Smith
The universe of private investors is heterogeneous by definition, and their behavior is not strictly reflected in the assumptions of the modern financial theory.
In fact, even the most basic parameters of investors’ segmentation, such as risk aversion, risk appetite, as well as the term and objectives of financial decisions change significantly among investors, and may lead to different perceptions and expectations about financial opportunities.
Therefore every investor shows her own financial personality, and at Valeur we thoroughly analyze every aspect of it, in order to model an investment portfolio consistent with her profile. The analysis of such financial personality is usually carried out on two levels:
1 - Analysis of the Personal Position
We identify the financial situation of the Client (such as source and order of magnitude of her wealth), the phase of her life, her attitude towards investments, her investment philosophy and preferences.
This analysis allows deriving some preliminary aspects of the financial personality: for instance (a) a successful entrepreneur, who created his fortune taking on a significant degree of market risk, will tend to show a higher risk tolerance and a deeper focus on controlling volatility, whereas (b) an investor who accrued his wealth through a savings plan will tend to be more risk averse and have a weaker perception on how risk can be managed.
Therefore, we believe that the perception of wealth is subjective, is a function of the way it was created and it has the potential to explain investors’ behavior and, on the other side, we do not classify or treat Clients differently based on the magnitude of their wealth, unlike common practice in the private banking arena.
2 - Analysis of the Psychological Profile
The psychological profile is drawn by the analysis of the process an investor goes through to determine her investment preferences, and it represents a link between traditional and behavioral financial theories.
Traditional financial theories describe the investor as (i) a rational individual having rational expectations, (ii) aiming at consistently maximizing her utility function, (iii) risk averse, (iv) with timely access to a complete set of information, and (v) able to take investment decisions efficiently by comparing the risk/return distribution of different asset allocation options vis-à-vis current investments (these are the assumptions underlying the “Capital Asset Pricing Model – CAPM” theory).
Actually investors react differently to uncertain and risky situations, especially when facing important decisions under time constraint. Therefore, in contrast with the classical view, investors tend to show (i) loss aversion, (ii) expectations affected byseveral factors such as overconfidence, and (iii) no integrated analysis of risk and benefits related to their actions.
Based on these principles, at Valeur we study our Clients’ profile in order draw a personal portrait and to reflect it into investment decisions and portfolio allocation.
Furthermore, leveraging on the competences and the experience gained within the Private Banking industry, Valeur offers to its Clients the opportunity do discuss “Socially Responsible Investments – SRI” (responsible towards the environment, the society, and the governance/investors) and represents a sensible counterparty when dealing with the financial personality of female investors.