Behavioural Finance for Private Banking

Behavioural Finance for Private Banking provides advisors of private clients with both the appropriate framework for their task as well as a collection of practical tools to support their work. The book begins with a brief introduction to the current challenges of the private banking industry before identifying the foundations of behavioural finance - decision theory. The book addresses the many psychological traps (behavioural biases) that are commonly observed along a typical decision-making process and in particular, how these biases differ across different cultures, something which is of vital importance for any bank offering private banking services worldwide. The authors then show how to integrate these insights into a tool of highly practical relevance - a risk profiler. The book also covers structured products - and how to evaluate them both from an expected utility theory perspective and from a prospect theory point of view. Moreover, the authors explain how to design structured, tailor-made products for private clients. The dynamics of investing are then explored by demonstrating which investor will rebalance their portfolio during the course of investments and which one will take their profits or increase risks providing a foundation for common investment advice like the age rule. The book concludes with wealth management showing how a typical advisory process should be structured to make the best use of the services the bank can offer, integrating personal asset-liability management, life cycle aspects, a risk profiler, a strategy implementation, and a well-suited documentation. In particular, readers will learn: How to assess the client's risk profile; How to find an optimal asset allocation according to client's risk profile; Which investment products are optimal from client's perspective; When it is wise to rebalance the portfolio during the course of investments, and when it is better to take the profits or to increase the risks; The foundation of some commonly used rules of thumb and when are they wrong; How to adjust the asset allocation over the life cycle A balance is made throughout the book between written explanations, examples, and case studies, with the use of some mathematics to deepen understanding. With a unique focus on client advisory as opposed to asset pricing, Behavioural Finance for Private Banking provides valuable insights and will enable practitioners to improve service quality at every step along the wealth management process.