Behavioral finance theory and asset allocation in wealth management

There has been a high concentration of private investor wealth primarily in the U.S., and so necessitates specialist investment advice by those who can deliver a financial plan that can satisfy a client's financial and personal goals dependent on their investment-time horizon. There has been growing concern, as mentioned by LeBlanc (2003), McGuigan and Eisner (2003), Elman (2004) and others, in how adequately investment planners are able to service their clients if there are perceived blind spots in various stages of the financial planning process, which can first stem from the client risk-tolerance questionnaires that many investment firms use, which result in poor asset recommendations, and so the importance of risk questionnaires are queried as indicated by Yook and Everett (2003). The importance of not scoring the time-horizon in a firms' risk questionnaire scoring system will also be critically evaluated with reference to primary and secondary data.;This study has first aimed to experimentally examine the existence of some of the important blind spots, be it loss aversion, mental accounting, framing, as in Tversky and Kahneman (1991) and how they influence the client decision-making process in financial planning. Secondly, to examine the uniformity in asset allocation recommendations of various corporate risk-tolerance questionnaires used by a singe investor, and whether the financial planning process proposes more congruent findings.;Online loss-aversion, mental accounting, and framing questionnaires were created and solicited to around 52 respondents who indicated their choice based on a series of options given for a set of questions. This was a better alternative as the surveys were intended to attract U.S. respondents, with some specifying a qualification.;Three corporate risk-tolerance questionnaires were used and solicited online to those affluent respondents that were firstly qualified, where the revolutionary P.A.S.S.(c) risk questionnaire proposed by Droms and Strauss (2003) was used as benchmark in comparing asset recommendations made by Cuna Mutual GroupRTM and Accutrade Inc.RTM Since this was an exceptionally time consuming process, only twenty were collected, hence a minor limitation.;Interviews with three of some of the worlds top investment banks (two U.S. based and one based in Zurich) plus a smaller U.S. securities firm, were conducted in gaining a practitioner's insight into the use of their specific risk-tolerance questionnaires with a focus to the investor's time-horizon, and how they effectively use behavioral theory in overcoming some of the impending blind spots, and thus ensuring a successful client-advisor relationship.;The results of the framing, mental accounting and loss aversion surveys, indeed confirm the existence of such blind spots and it's appearance and impact in financial planning using relevant literary sources for analysis.;Asset allocations proposed by the risk-tolerance questionnaires used, suggested dissimilar asset portfolios due to its poor correlation for the investor in concern, thus demonstrating the inaptness of various risk-tolerance questionnaires that lie in its inappropriate framing of questions and overall questionnaire design, confirmed by both Yook and Everett (2003) and Moody (2004).;Mixed reviews were offered by the interviewees for the series of questions addressing both risk-tolerance assessment and how they use behavioral theory in overcoming client blind spots. A unanimous conclusion was drawn suggesting that financial planning supercedes any asset allocation made by a standard risk questionnaire, and so tantamount to the findings in this study and by those made in the literature review. The analyses of the corporate interviews were critically evaluated and implications drawn in relation to relevant survey results and to the literature review.