Corbin Footitt, a Portfolio Manager at Verecan Capital Management, is advocating for a fundamental shift in how the wealth management industry addresses behavioural risk. He contends that managing clients’ emotional responses and potential irrational decision-making is not a reactive measure to be deployed solely during market turmoil, but rather an operational imperative that must be woven into the fabric of every client interaction. This proactive and integrated approach, Footitt asserts, is crucial for long-term client success and advisor effectiveness.
The prevailing sentiment within the wealth management sector, particularly with the ascendance of comprehensive financial planning, is that behavioural risk often eclipses traditional market and inflation risks. The underlying assumption is that the most significant detriments to a client’s financial well-being stem not from external market forces, but from internal behavioural pitfalls such as panic selling during downturns, chasing market highs, or deviating from a carefully constructed financial plan. The industry has largely coalesced around the understanding that it is often poor client behaviour that leads to the classic investor mistake of buying high and selling low. The critical challenge, therefore, becomes how financial advisors can effectively mitigate and manage this inherent human tendency.
Footitt’s core thesis revolves around "operationalizing" behavioural advice, moving it from the realm of a "soft skill" to a systematically integrated practice. While behavioural management is frequently perceived as a supplementary element, engaged only when clients exhibit pronounced worry or distress, Footitt posits that it must be a constant consideration throughout an advisor’s engagement with a client. He outlines how consistent communication, meticulous planning, the application of nuanced soft skills, and judicious asset allocation can collectively serve as powerful tools to counteract both client and advisor behavioural biases.
"It’s treated as a client education piece rather than an actual practice management operational piece," Footitt explained in a recent discussion. "If advisors are only reaching out at times of turmoil, it will lead the clients to believe that anytime the advisor reaches out, something’s wrong." This reactive approach, he argues, fosters a negative association with advisor contact, potentially causing clients to disengage or distrust communication when it is most needed. He further elaborated on this point, stating, "I see it not being built into review meetings. It’s not being built into rebalancing. The actual behavioural side of it is only being brought up when the advisors feel that the behaviour is going to be detrimental to the client… In the absence of only doing it at that time, you run the risk of not being able to actually coach the client and get them to understand what it means for them in the long run." This highlights a critical gap where behavioural insights are often siloed, rather than integrated into routine advisory processes.
Behavioural Risks Transcending Market Cycles
Footitt emphasizes that behavioural risks are not confined to bear markets; they are equally potent during periods of market exuberance. He has observed instances during the recent bull run where the pervasive fear of missing out (FOMO) has motivated investors to question their portfolio performance, particularly when market returns have surged past 20%. He recounts instances of clients inquiring about speculative opportunities like the SpaceX IPO, even though such ventures fall outside the firm’s established investment mandate and risk parameters.
While Footitt expresses satisfaction that the majority of his clients have steered clear of highly speculative or hyped market instruments, he underscores the paramount importance of consistent communication, firmly anchored in the client’s financial plan. When clients express a desire to chase higher returns in a buoyant market, Footitt can effectively redirect their focus to their established plan, which outlines a specific return threshold. This allows him to highlight the risks they are now protected against on the downside, reinforcing the value of their existing strategy. Consequently, he firmly believes that behavioural risk management should be an integral component of portfolio construction precisely for these reasons.
"The best portfolio on a spreadsheet might not be the best for a client if they can’t weather whatever volatility it might hold," Footitt stated. "So it needs to be financially appropriate, but as well behaviourally suitable, because that helps us then balance the growth, the income, the volatility, downside protection, and their overall comfort." This perspective underscores a holistic approach to portfolio design, where the quantitative metrics of a portfolio must be harmonized with the qualitative, emotional resilience of the investor.
As a discretionary manager, Footitt benefits from the trust his clients place in his firm to manage asset allocation effectively in pursuit of their financial objectives. However, he acknowledges that even seasoned professionals can experience the emotional pull of investing. At Verecan Capital Management, a robust investment committee structure plays a pivotal role in steering decision-making for client portfolios. Footitt explains that the open discussion of investment ideas among trusted colleagues helps to temper the emotional drivers that might otherwise influence a potential decision, fostering a more rational and objective investment process. This collaborative environment serves as a crucial check against individual behavioural biases.
Navigating a Noisy Information Landscape
The cornerstone of Footitt’s strategy for managing behavioural risk is consistent and deliberate communication. He highlights the contemporary media landscape as a significant contributor to client anxiety, creating immense pressure for immediate reactions and decisions based on sensationalized news. Through frequent and proactive messaging, delivered during both periods of calm and heightened tension, Footitt aims to mitigate the undue influence that news cycles can exert on client emotions.
"It’s made every headline seemingly feel like a decision point," Footitt remarked, referring to the current media environment. "More information doesn’t necessarily make people more informed, it makes people more reactive." This observation points to a critical paradox: the proliferation of information, rather than fostering greater understanding, can lead to increased impulsivity and less thoughtful responses.
Footitt illustrates this point with an anecdote about a client reacting to news of rising corn prices in Malaysia, a development with no direct bearing on their investment portfolio. However, due to the often alarming and life-or-death framing of news in the current media environment, the client experienced an emotional reaction akin to receiving news of geopolitical conflict. This suggests that the medium through which news is consumed can sometimes be more influential than the news itself, eliciting a consistent emotional response regardless of the actual relevance or impact of the information.
Footitt’s antidote to this is unwavering consistency in his communication. He dedicates himself to understanding what has already been priced into the market, discerning the forward-looking implications of market movements, and clearly articulating how his clients are protected. His primary objective is to swiftly reorient the client back to their financial plan, a principle he reinforces across all market conditions and news cycles. This communication strategy is intrinsically linked to his behavioural risk management efforts. Just as his asset allocation strategy, his financial planning work, and every other facet of his advisory role are meticulously designed to achieve client objectives, they are also fundamentally geared towards the overarching goal of managing behavioural risk.
"It shouldn’t just be a soft skill like asking better questions," Footitt concluded. "It needs to be something that is really integrated throughout every single touch point that the advisors are having with the clients. Consistent messaging, timely communication, context back to their goals. And then that helps reduce the emotional decision-making that clients often fall into." This encapsulates his call to action for the industry: to elevate behavioural risk management from an ancillary concern to a core operational competency, embedded in every client interaction and decision.
Broader Implications and Industry Response
The implications of Footitt’s perspective extend beyond individual client relationships. In an era characterized by rapid information dissemination and heightened market volatility, the ability of financial advisors to effectively manage client behaviour is becoming a key differentiator. Firms that can demonstrate a robust framework for behavioural risk management are likely to foster greater client loyalty, reduce asset attrition during turbulent periods, and ultimately achieve superior long-term outcomes for their clientele.
Industry analysts suggest that the increasing focus on behavioural finance, a field that merges psychology and economics, is a natural evolution for a wealth management industry grappling with the human element of investing. While specific data on the prevalence of integrated behavioural risk management practices across the industry is still emerging, anecdotal evidence suggests a growing awareness. Many advisory firms are investing in training programs for their advisors on behavioural coaching techniques and emotional intelligence. However, the challenge, as Footitt points out, lies in translating this awareness into tangible operational changes.
The integration of behavioural risk management requires a cultural shift within advisory firms. It necessitates leadership buy-in, the development of standardized processes, and a commitment to ongoing professional development for advisors. Furthermore, it calls for a re-evaluation of performance metrics, potentially incorporating measures of client behavioural adherence and emotional well-being alongside traditional financial performance.
As market conditions continue to fluctuate and the information landscape becomes increasingly complex, the proactive and embedded management of behavioural risk, as advocated by Corbin Footitt, is poised to become an indispensable element of successful wealth management. It represents a strategic imperative for advisors seeking to build enduring client relationships and deliver sustainable financial success in an ever-evolving financial world.
